The Office of Tax Simplification has proposed extending the period over which divorcing couples can retain their capital gains tax exemption, in a move that was welcomed by tax specialists.
Under current rules, divorcing couples can retain their exemption when transferring assets between each other for the tax year of separation but the OTS has recommended extending the period to the end of the tax year at least two years after the separation.
Experts welcomed the proposal for offering divorcing couples with more “time and space” but warned that couples are often unaware of the tax liabilities they face in separating.
Kay Ingram, public policy director at LEBC, said: “The OTS proposal to extend the period over which married couples and civil partners can transfer assets between each other without paying capital gains tax for up to two years after the tax year of separation is welcome.
“However, many couples separating do not realise that separation will affect their eligibility for a number of tax concessions, CGT being just one. Exemptions from inheritance tax, and eligibility for marriage allowance and some State and private pension benefits are also lost on divorce. Couples need to address the financial split ahead of the legal process starting or they could be facing unexpected tax bills, loss of pension benefits and inheritance rights.”
Rosie Hooper, chartered financial planner at Quilter, commented: “It is encouraging to see the OTS recognise the stress and complications that come with divorce settlements. It is important that divorcing couples have the time and space to process what is a significant and difficult period in their lives. Extending the ‘no gain no loss’ window to the end of the tax year two years after the separation is a positive step and should prevent CGT difficulties cropping up unexpectedly.
“Of course, much of this relies on the government taking these reforms forward. CGT reform has been on the cards for many years before and will remain on the table for as long as the nation’s finances are in a precarious state and the government pursues its levelling up agenda. For now, however, CGT remains a complex tax that can be difficult to get your head around. It also interacts with a number of other taxes, such as IHT, so anyone facing a CGT charge should consider getting advice as without it you could find yourself with an unexpected tax bill.”
The OTS is also calling upon the Government to extend the CGT reporting and payment deadline for those selling property to 60 days, after noting that the current 30 day deadline was a “very ambitious” target for many taxpayers. According to the OTS, a third of initial returns took longer than 30 days to arrive.
The OTS has also sought to simplify the administration process around CGT with the suggestion of an overhaul in the way individuals report gains.
Current rules provide people with three ways of reporting a capital gain – Self Assessment; the UK Property tax return and the Capital Gains Tax service.
The OTS has proposed that these are brought together in a Single Customer Account, which it said would “ease the administrative burden” for the 500,000 people who file returns of disposals every year.
Despite the OTS’ attempt at simplifying the system, Laith Khalaf, financial analyst at AJ Bell, said it remained “fiendishly complex”.
Khalaf said: “It’s good that the OTS is trying to raise awareness, iron out wrinkles, and simplify capital gains calculations for investors, but it remains a fiendishly complex tax. The saving grace is really the limited number of people who pay it, thanks to a relatively generous annual allowance, and the availability of tax shelters like ISAs and SIPPs. The OTS actually thinks the annual allowance should be cut drastically, which would leave many more taxpayers on the hook for Capital Gains Tax, and having to get their heads round all the complexities involved. So far the government hasn’t adopted that recommendation, much to the relief of investors up and down the country.
“The OTS may well feel the Chancellor has left them hanging after failing to enact their previous recommendations to increase Capital Gains Tax. However, these latest proposals are more technical than ideological, so will not be as controversial to enact. Investors shouldn’t entirely discount the potential for changes to Capital Gains Tax further down the road though, and so should still make use of their annual ISA allowance to shelter as much as possible from the taxman.”