Capital Gains Tax changes may reveal underpaid tax

Changes to regulations regarding Capital Gains Tax (CGT) and separating couples could alert people to the fact that they may have failed to pay sufficient tax in the past.

New measures to ease difficulties over the transfer of assets experienced by spouses or civil partners who are separating and enable them to split in a tax-efficient manner have been widely welcomed.

Announced by the Government in the last Budget and applying with effect from April 6 2023 the regulations extend the time allowed for ‘no gain/no loss’ asset transfers to up to three years, or unlimited time if it is the family home that is transferred under an agreement or a court order.

Under the previous regime, couples had only until the end of the tax year of permanent separation to benefit from the no gain/no loss relief, often creating great stress at an already difficult time. If they happened to separate in March, this would create only a very small window of time to transfer assets without triggering a potential CGT charge.

Experienced Private Client tax specialist Tracy Underwood, Azets Partner, based at the firm’s Guildford office, has welcomed the changes as a major step forward.

However, she said: “For many couples separating, it appears the previous rule that applied up until 5 April 2023 was not well known or understood. Separating couples may assume the transfer of assets between themselves continued on a no gain no loss basis up until the point the separation was finalised by divorce or dissolution, Unfortunately, this was not the case

“Although many lawyers will recommend that tax advice is acquired in these situations, this is not always followed up. However, the tax implications of divorce is an important part of understanding the full ramifications of a financial settlement.

“Individuals who have previously gone through this process and are now concerned that they may have underpaid tax should get specialist advice on how to quantify and report this to HMRC.

“And if you are going through this process at the moment, then please do make sure you get appropriate tax advice so that you fully understand your position.”

Underwood added that the situation often becomes more complicated if a business is involved.

She said: “This extension may be of particular interest where one of the parties is a business owner and where shares may form part of that settlement.

“The valuation of private business shares can take a long while to agree and may well have previously extended beyond the period where a no gain no loss transfer was possible.

“It could also be relevant where properties are involved and formal valuations may be required, particularly where the financial settlement is dependent on a sale. The new rules include special provisions which apply in circumstances where an individual retains a financial interest in their former family home after a separation and the home is then sold.

“Publicity surrounding these CGT changes will hopefully alert people both to the fact they may need to take action to avoid certain pitfalls to ensure that their financial settlement on separation takes into account the effect of any tax liability – not just capital gains tax – and the correct tax is paid.”

Latest figures from the Office for National Statistics show that in 2021 there were 113,505 divorces granted in England and Wales, a 9.6% increase compared with 2020 when there were 103,592 divorces.

CGT is the tax on the gain arising which applies when certain assets are sold. If the asset has increased in value from when it was acquired, then a tax on this gain may be payable – although a number of reliefs and allowances are available.

It is payable on assets such as property that is not the main home, shares, business assets and certain personal possessions valued at more than £6,000.

Underwood also warned that CGT benefits that apply to separating couples, old or new, do not apply to unmarried couples or those not in civil partnerships.