How the proposed Capital Gains Tax changes could impact on divorce and financial agreements
The report includes a suggestion that the annual exemption for CGT (currently no CGT is levied for gains of £12,300 or less in a given tax year) could be removed.
This proposal comes in a year which has already seen the introduction of major changes to the CGT regime which affect the affairs of separating couples. As from 6 April 2020, the qualifying period for principal private residence (PPR relief) has been reduced to nine months, lettings relief has all but disappeared, and, crucially, tax is now payable in full within 30 days of disposal.
Almost inevitably, the breakdown of a marriage carries a degree of financial turbulence. In most cases, the parties’ physical separation cannot be delayed until a financial settlement has been finalised, leading to one of them agreeing, more or less graciously, to move elsewhere in the interim. This can indeed be the best decision on the ground, especially when tension in the couple runs high and the emotional wellbeing of children needs to come first.
This can possibly be not the most tax efficient decision, however. Disposals between spouses after the end of the tax year of separation are likely to attract CGT, and nine months are often insufficient to finalise a financial settlement, particularly if there are Court proceedings.
As matrimonial practitioners, since the beginning of the current tax year we have become more alive to the need for appropriate provision to be made for the payment of tax in the context of a settlement, and to the liquidity issues that come with it. We have seen clients struggle to raise the necessary funds within such a short period of time, often at the same time as dealing with financing the purchase of a new property to occupy as their home. In addition, property transaction times are protracted due to the pandemic, making the timescales even more punitive.
The comparably lower rate of tax and the availability of an annual exemption have been a lifeline and many going through a divorce will be concerned at the proposed changes in the regime.