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If need to seek legal advice regarding the changes to Capital Gains Tax legislation or Lifetime Allowance provisions, please contact our Family solicitors:
Capital Gains Tax
Recent changes to the rules in relation to Capital Gains Tax (CGT) apply to the transfer of assets between spouses and civil partners who are in the process of separating.
The aim is to provide spouses/civil partners with more time to transfer assets without worrying about CGT's implications and how this would affect any future financial settlement.
The new measures are designed to be more flexible and hopefully reduce pressures for separating couples and families.
The changes will apply to transfers of assets on or after 6 April 2023.
Summary of changes
- Spouses/civil partners will be given three years to make no gain/no loss transfers of assets between themselves when they cease living together (provided the court has not already made the pronouncement of Decree Absolute/Final Order).
- If the assets are already subject to a formal divorce agreement, there is no time limit to make no gain/no loss transfers between spouses/civil partners.
- Private Residence Relief will be available to claim on the sale of the former matrimonial home for those spouses/civil partners who retained an interest in the property as part of the settlement.
The rules apply to all capital assets, including properties, shares and land. As with the previous rules, the CGT charge does not disappear, and the receiving spouse will be responsible for paying the CGT on future sales or transfers of the asset.
The rules pre-6 April 2023
The transfer of assets between spouses and civil partners can take place at a no gain, no loss for CGT purposes up to and including the year of a permanent separation, provided it is in the same tax year.
This means any gains or losses from the transfer are deferred until the receiving spouse disposes of the asset.
If, however, the transfer of assets was to take place outside of the tax year of separation, then it would be treated as normal disposal and will be subject to CGT in the normal way.
Lifetime Allowance
At the Spring 2023 Budget, the Chancellor announced that the LTA will be abolished. The LTA will remain in place for 2023/24, but the tax charge that arises when it is exceeded will be disapplied.
Effectively, this means that from 6 April 2023, any benefits 'crystallised' in excess of the LTA (£1.073m) will be subject to income tax at the recipient's marginal rates.
The treatment will affect the following:
- Serious ill-health lump sums and lifetime allowance excess lump sums payable before the member reaches 75; and
- Defined benefits lump-sum death benefit and uncrystallised funds lump-sum death benefit where the member concerning the receipt died before reaching age 75.
The rules were introduced to ensure people stay in work for longer or encourage those to return to employment, if possible, to stimulate economic growth.
What does this mean?
Pension savers who previously had concerns that they may reach the LTA now have unlimited headroom on their total pension savings (subject to the annual limit).
For individuals concerned about taking the 25% tax cash-free, this will now be capped and frozen at £268,275 (i.e., 25% of the current LTA).
The rules pre-6-April 2023
Lifetime Allowance (LTA) is the maximum amount of tax-relieved pension savings an individual can make over their lifetime.
The limit is currently set at £1,073.000. Individuals may contribute to their pension over these limits but will be subject to a tax charge on the amount above the allowance.
The tax charge will either be 55% as a lump sum or 25% as a pension.