L- Day: For individuals - a stable period for Capital Taxes continues

Capital Taxes will likely remain fairly stable helping individuals making long term plans and, welcome changes to divorce tax rules.

Capital Taxes will likely remain fairly stable helping individuals making long term plans

Draft clauses have been published to bring about a much-needed change to the tax system for divorcing or separating couples. This change, first recommended by the Office of Tax Simplification, should simplify the process, and reduce the tax burden for these taxpayers. There is also a clarification of reliefs for members of Limited Liability Partnerships and partners in Scottish partnerships who dispose of land and residences. Taken in isolation, these welcome changes will impact only a small number of people. No major changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) are a reassuring indicator of the ‘big’ picture for these Capital Taxes – despite the current discussion of tax policies as part of the Conservative Leadership race, it seems likely that the capital tax regime will remain fairly stable, which will be good news for individuals and families making long term plans.

L-Day is a continuation of themes from the Spring Statement

Earlier this year, the then Chancellor Rishi Sunak delivered his Spring Statement confirming that the Government's goal is to make the tax system simpler, fairer, and more efficient through a ‘Tax Plan’. The announcements on L-Day have not changed this as the two key proposed changes for individuals are very specific and are welcome simplifications.

Separating spouses and civil partners

The draft clauses provide that spouses and civil partners who are in the process of separating, will be given up to three years following the end of the tax year in which they cease living together in which to make no gain no loss transfers of assets between themselves for CGT purposes, and unlimited time if the assets are the subject of a formal divorce agreement.

There are also provisions:

  • Enabling a spouse or civil partner who retains an interest in a former matrimonial home to be given the option to claim Private Residence Relief when it is sold; and 
  • For a spouse or civil partner who receives a percentage of the proceeds when a home is eventually sold to be able to apply the same tax treatment that applied when they transferred their original interest in their home to their ex-spouse or civil partner.

This enables a fairer position and allows more time to make such transfers without incurring a possible CGT charge. The changes will apply to disposals on or after 6 April 2023.

At present there are no proposals to make changes to the IHT rules, but this may be addressed by the Government following the next stage of the consultation. The current rules provide that transfers between separating parties are exempt from IHT up to the date of the decree absolute; thereafter such transfers will be exempt if made pursuant to a Court Order but are otherwise a Potentially Exempt Transfer.

Members of Limited Liability partnerships (LLPs) and partners in Scottish Partnerships

Draft clauses have been published to clarify that members of LLPs and partners in Scottish partnerships are treated the same way as English partnerships for CGT roll-over relief and Private Residence Relief, on exchanges of an interest in land or private residence held, prior to the disposal, by the partnership. The changes, which reflect the intention of the relevant legislation, will have effect for claims for relief made on or after Budget 2022.

If you would like to discuss any of the points above, please contact Jo Bateson, Daniel Crowther or your local Family Office and Private Client contact.