Finance Bill 2022-23: Family breakdowns to avoid penal tax charges

Kate Aitchison, private client tax director at leading audit, tax and consulting firm RSM UK, comments on draft legislation published today in Finance Bill 2022-23: ‘The pain of a family breakdown should no longer be compounded by penal tax rules when the draft legislation comes into force. Currently, married couples and civil partners only have until the end of the tax year in which they permanently separate to transfer assets between themselves if they want to benefit from a no gain/no loss transfer for tax purposes and avoid being subject to an unwelcome capital gains tax (CGT) bill.

‘Data from the Office of National Statistics estimated that the divorce rate in the UK is still high at 42 per cent, although there was a reduction in divorce rates during 2020. Factors affecting couples’ financial circumstances, including the economic impact of the coronavirus pandemic and the cost-of-living crisis, may have forced former spouses to continue sharing a roof despite being permanently separated. HMRC will often enquire to establish the date of permanent separation for tax purposes and this can add unwanted scrutiny at what is already an emotional and stressful time.

‘The Office of Tax Simplification had recommended to the Treasury that in order to ease this pressure, the no gain/no loss rule should be extended to two years from the date of permanent separation. Today’s draft Finance Bill has gone one step further, providing former spouses up to three full tax years in which to transfer assets without a CGT charge. This is extended to an unlimited time if the assets transferred are subject to a formal divorce agreement.

‘It also introduces further rules to ensure that those who continue to hold a financial interest in their former marital home are not penalised on the eventual sale and may be able to claim principal private residence relief. The new legislation comes into effect for disposals which occur on or after 6 April 2023.

‘With divorce rates and house prices on the rise, the cost to the Exchequer, which has not been published, could be sizeable.

‘The change in rules is long overdue as it was grossly unfair on some separating married couples and civil partnerships. For example, a married couple that permanently separated on 6 April could have a year to sort out their affairs whereas one breaking up on 4 April would have just one day. There was no real logic to the rules and thankfully the Treasury has now acted to change them.

‘We will now have a much fairer system which should allow the focus of marriage breakdowns to be on the fair allocation of assets and other divorce considerations, rather than worrying about the tax implications.’