Call to reform CGT rules for divorcing couples

Accountancy firm Milsted Langdon, has joined family law organisation, Resolution, in calling for reforms to the capital gains tax (CGT) system - making it fairer and simpler by introducing a general relief for asset transfers arising for divorcing couples 

Resolution is preparing a response to the Office of Tax Simplification’s (OTS) review of the CGT system.

Within the review, the OTS is enquiring about a wide range of CGT issues, including the application of the rules to assets following a change in marital status. 

According to the response prepared by Resolution and Roger Issacs, forensic partner at Milsted Langdon, CGT rules can sometimes give rise to onerous tax bills for those who are trying to sort out their finances equitably on separation and divorce.

This is particularly the case where assets are transferred between parties, but not sold, as a consequence of divorce. Resolution argues this at odds with the treatment of other taxes, such as inheritance tax (IHT) and stamp duty land tax (SDLT). 

Roger said that the treatment of CGT particularly affected couples with a second home, business and/or investments.

‘Under IHT regulations, HMRC recognises that there is no transfer of value or intention to create a bounty for transfers between spouses on divorce, but this is not mirrored in CGT, which means couples could face a significant tax liability when they transfer assets after a divorce,’ said Roger. 

He added: ‘Presently, transfers of assets can be made between spouses without a taxable gain arising only in the tax year of separation. 

‘If a couple separates on 6 April, the parties have a year to make tax-free disposals but if they separate on 31 March, they have less than a week.

‘This is wholly arbitrary and fails to take into account the fact that for most divorces it takes many months to conclude a financial settlement after decree absolute is granted.’

HMRC has also changed a long-held policy regarding business assets gift relief, so that disposals and transfers where ‘hold over’ tax relief had previously been available no longer benefit. 

‘For many years, spouses have been able to transfer business assets after the year of separation without triggering tax. They do so by claiming hold-over relief,’ explained Roger. 

‘This means that no tax is payable when the assets are transferred but becomes payable if and when the assets are sold by the transferee in future. At that time, the taxable gain is calculated with reference to the acquisition cost of the transferor. 

‘HMRC has changed its previous long-standing view regarding the availability of hold-over relief. It seems wholly at odds with previous guidance and we are joining Resolution in a call to reform the CGT rules in this area.’

Resolution has asked for the OTS to consider a fairer and simpler approach that is consistent with other taxes that would introduce a general relief from CGT for asset transfers arising as a result of divorce. 

This would mean that transfers between divorcing couples would be exempt from CGT where they take place in accordance with a relevant court order, whether by consent or otherwise.

Simon Denton, Milsted Langdon’s forensic tax partner and a specialist in tax in divorce said: ‘It is good to see that the OTS and by extension, the government, is seeking to address issues within the complex CGT rules. 

‘The taxation of transfers of assets between divorcing and separating couples is often a bone of contention, so I hope that the OTS is willing to consider improvements that provide parity with other forms of tax.’

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