Forensic accountant urges lawyers to be cautious about no gain, no loss window extension

A forensic accountant at a Midlands accountancy firm is urging family lawyers to be cautious about the extension of the no gain, no loss window on separation.

Adrian Pym, director at Prime Accountants Group, said couples must remember that a delay does not make the tax go away. The Finance (No.2) Bill bringing in the changes has yet to receive Royal Ascent, so is not yet law.

The Capital Gains Tax rules on separating couples were set to change on 6th April 2023 and provides a welcome tax break by extension of the no gain, no loss window on separation, to three years. However, the capital gains tax liability is not extinguished, it is merely deferred until the eventual sale of the property. Adrian said:

“Separation is never an easy time for anyone. It’s highly emotional, yet the practicalities of the situation are unavoidable.

The current Capital Gains Tax rules for divorcing parties could create a tax liability on transfer of assets after the end of the tax year of separation.

These current rules do not allow for the practical time required for financial settlements to be agreed and the time taken for a transfer of assets.

The new Capital Gains Tax rules from 6 April 2023 will remove the immediate liability to pay capital gains tax for three years or the formal divorce agreement being finalised.”

Adrian continued to state that “under the current rules if a divorcing party were to transfer a property valued at £400,000 after the tax year of separation which generated a capital gain on transfer of say £100,000, the capital gains tax payable by the transferring party would be £28,000 if they are a higher rate taxpayer”. He added:

“Under the new rules, there would be no gain, no loss and, therefore, the capital gains tax payable at the time of the transfer would be nil.

So, using the above example, if the same property were sold shortly after the formal divorce agreement/three years, then the gain of £100,000 would be taxable and the liability would be that of the receiving spouse.

The property is, therefore, said to be ‘pregnant with gain’ and the transfer value should consider the tax liability on eventual sale.

If it is very likely the property will be sold soon after the divorce is finalised, then the value to the receiving spouse is not the market value of £400,000 but £372,000 (£400,000 less the CGT liability of £28,000).”