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What do new CGT reforms mean for the future of divorce?

Henry Crisp, Senior partner at the family law firm, Crisp & Co, has predicted what the future of divorce will look like following the new Capital Gains Tax reforms commencing on 6th April.

Under the current Capital Gains Tax (CGT) laws, separating couples transferring their assets should do so within the tax year of separation to ensure no CGT is payable.

After this period, any transfers are to be taxable for CGT purposes. For instance, if a couple were to divorce in December, they would have until April 5th until they would be entitled to pay.

On 6th April 2023, these restrictions are changing. It was announced by the Chancellor in the March budget that this period of “no gain, no loss” transfers would be extended to three tax years.

This affords spouses and civil partners who are separating and don’t live together more time to transfer assets between themselves as part of a divorce settlement.

Two further reliefs have also been introduced which include the option for an ex-spouse to claim Private Residence Relief (PRR) on the sale or transfer of the family home, even if this is more than nine months after they leave. Under current law, the ex-spouse or civil partner can only claim PRR on the sale within nine months of them leaving.

Additionally, if one ex-spouse has transferred their interest in the home to their former partner, but remains entitled to receive a percentage of the proceeds when that home is sold, they will be able to apply the same tax treatment to those proceeds that applied when they transferred their interest to their former spouse.

Below, Henry Crisp predicts how these tax reforms will impact the nature of handing over assets during a divorce:

  • Implementing a longer period may result in less hostility and acrimony in the divorce proceedings, due to reducing stress set by somewhat unrealistic standards of transferring assets before the end of the tax year.
  • The family courts are often an environment which is overburdened, and court hearings can take months to set in motion. These tax reforms will mean that parties involved may feel under less time pressure, given that most proceedings can be resolved in the time frame.
  • Having an extended no gains, no loss window means that divorcees will have more time to prioritise childcare needs and focus on their emotional health, re-house and meet any future needs. This can help individuals and families who might need financial resources to be allocated to these things the most.

Henry said the following on the extended CGT window:

“The current CGT deadline is often impractical and adds further pressure to the separating couple during a challenging time. This is especially true for intricate financial agreements which involve prolonged negotiations or court hearings scheduled months in advance, rendering the April 6th deadline unrealistic for many.

In reality, transferring assets before the end of the tax year following separation is often unfeasible and may result in a substantial tax liability that must be paid from the marital pot. This coincides with a time when funds are necessary for both parties to find new housing and meet future needs, including those of any children or dependents.”

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