New legislation is set to simplify one aspect of tax on divorce or dissolution.
Marriage is not what it used to be. In 2020, 46% of births in England and Wales took place outside of a marriage or civil partnership, according to the Office for National Statistics. Even so, UK tax law still draws sharp lines between married and civil partners, and the unmarried:
• Gifts and bequests between married couples and civil partners are generally free of inheritance tax (IHT), regardless of their size. The unmarried enjoy no such favourable IHT treatment and must plan accordingly.
• Married couples and civil partners can benefit from a marriage allowance of £1,260, if one partner is a non-taxpayer and the other pays no more than basic rate (intermediate rate in Scotland).
• A married couple or civil partners can only have one private main residence for capital gains tax (CGT) purposes, but the unmarried can have one each.
• Transfers of investments and other assets between couples and civil partners are deemed to take place on a no-gain-no-loss basis, meaning there is no CGT involved.
That last tax break currently requires the transfer to be made during a tax year in which the couple are living together. This condition can create complications for divorcing couples or dissolving civil partnerships, as in 2020, the average time between applying for and securing a divorce in England and Wales was 53 weeks.
In its second report on simplifying CGT, the Office of Tax Simplification (OTS) recommended that the CGT-free transfer period should be extended to at least two tax years after the tax year of separation. Although the government rejected many of the reform proposals in the OTS’s reports, it did accept that the CGT-free window on separation should be increased.
That decision has now reached the stage of draft legislation, the most important part of which will increase the CGT-free period to up to least three tax years after the tax year of separation. The new rules will take effect from 6 April 2023.
The change is long overdue, but it is only one simplification in a process where financial technicalities abound, and advice is vital.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.