Our response relates to question 6 of the Main Call for Evidence.
Question 6: Are there particular practical challenges or issues arising from the CGT rules about acquiring, disposing of or transferring assets on marriage (or civil partnership), separation or divorce?
The CGT rules can sometimes give rise to onerous consequences for those who are trying to sort out their finances equitably on separation and divorce and where an asset is being transferred between the parties, but not sold, as a consequence of divorce.
This creates an anomaly in the tax system for divorcing couples between the treatment of CGT and other taxes; and we are unclear why CGT is treated differently and less simply.
In practice CGT is only likely to be an issue for those couples with a second home, business and/or investments (for those with one property, the former matrimonial home, there is an exemption in place that can be used on any transfer outside of the year of separation). But for those who are affected, CGT is at complete odds with the tax treatment of IHT and SDLT on divorce.
In our view, it seems wrong and unfair to have the IHT rules recognising that there is no transfer of value or intention to create bounty for transfers between spouses on divorce, without a similar mirrored principle for CGT.
It is unfair that transfers of assets can be made between spouses without a taxable gain arising only in the tax year of separation. If a couple separates on 6 April, the parties have a year to make tax- free disposals but if they separate on 31 March they have less than a week. This is wholly arbitrary and fails to take into account the fact that for most divorces it takes many months to conclude a financial settlement.
It is of particular concern that, following a change to its procedures manual in August 2019, HMRC appears to have changed its long held policy regarding business assets hold-over gift relief where a transfer is made pursuant to a court order, and is now seeking to tax these disposals where it had previously accepted that section 165 applied (following the case of G v G  EWHC 1339
(Fam)). This appears at odds with section 225B TCGA 1992 which extends the deemed occupation period for the former marital home transfers on divorce. We are also surprised at the 2019 guidance change, so long after the case of Haines v Hill  EWCA Civ 1284 on which it seeks to rely, and which is not a tax or divorce case. It could cause severe problems for divorcing spouses because transferors could find themselves facing very large tax bills in circumstances when there are no proceeds of sale from which to fund them with “deemed proceeds” calculated with reference to the market value of the assets.
Resolution considers that it would be fairer, simpler and consistent with the approach to other taxes to introduce a more general relief from CGT for asset transfers arising as a result of divorce. This would mean that transfers between divorcing couples would be exempt from CGT where they take place in accordance with a relevant court order whether by consent or otherwise. Any transfers prior to the decree absolute would be on a no gain/no loss basis. Further consideration might be given to whether this relief should be similar in form to gift relief so that, when the asset is ultimately sold, the whole gain made during both spouses’ period of ownership up to the date of the court order is taxed.
We would be happy to offer the OTS further discussion with our members on this issue if that would be helpful.
For further information please contact:
Rachel Rogers, Head of Policy
Resolution, August 2020