A new ruling may affect separating couples by increasing the amount of capital gains tax (CGT) paid by those who choose to move out of the family home before the property is sold.
Capital gains tax is applicable when you sell an asset that has increased in value since its purchase. Property is one of the most commonly taxed asset, and also often makes up the most valuable shared asset for divorcing couples.
Current rules state that to avoid paying capital gains tax you must sell a property within 18 months of moving out. However, as of April 2020, this timeframe will be reduced to just nine months. After this point, any profit made on the sale will be subject to capital gains tax if one or both parties are no longer living there.
In many circumstances, this is not an issue, since most people remain in their homes until it is sold, and any sale or purchase of property happens more or less concurrently. However, for divorcing couples, one spouse often moves out of the family home during the process of separation, but the property may not be sold for a considerable amount of time afterwards. This means that whoever moves out will be subject to capital gains tax on their portion of the profit when the property is finally sold, while the person who remained in the house will not be taxed on their share.
- A married couple buy a home together for £250,000.
- Ten years later they decide to separate and agree to sell the house after the divorce.
- They choose to wait four years living separately to simplify the separation process. Spouse A remains in the home with the children, while Spouse B moves out.
- By now the property is worth £500,000, making them a profit of £250,000, which they split 50/50.
- When they come to sell the property, Spouse A gets full private residence relief on her profit of £125,000, but Spouse B has to pay capital gains tax on their portion since they have lived elsewhere for longer than the exemption period.
Capital gains tax on property is calculated according to taxpayer rate and the amount of time spent living elsewhere, minus a personal CGT allowance. The new rules may potentially double the amount of tax paid on property for separating couples by halving the amount of time given to sell a property. This may also result in couples living together for longer in order to avoid paying tax, causing unnecessary friction within an already fragile relationship.
When it comes to divorce, nine months is not a very long time to negotiate and settle the various legal and financial issues involved – not to mention selling property – and adding an extra deadline will only increase stress for couples already going through a difficult time.
While it’s not possible to get around the new rules, there are ways of potentially offsetting this new complication during the separation process. One option is to opt for a more collaborative approach to divorce, such as mediation, arbitration, or collaborative family law. Not only are these methods more cooperative, they tend to also be faster, cheaper, and simpler than going through the courts, meaning that you may be able to come to a practical agreement on living arrangements and how to deal with any resultant capital gains tax in a cooperative way. Another option is to choose to offset the absent party’s taxable gain with a greater proportion from the shared pot, or decide to make selling their property a priority.
Property and living arrangements are often a major aspect of divorce negotiations, and these kinds of decisions should be given serious consideration to ensure that each member of the relationship is able to support themselves, and any children involved. Take a collaborative approach if possible, and never enter into any agreements without the professional guidance of an experienced solicitor.
For more information on property law, divorce and separation, and the various collaborative options available, get in touch with our friendly solicitors at Frances Lindsay & Co. It’s our job to take the weight off your shoulders and find the right solution for your circumstances. Book a free 45-minute family law appointment to discuss your needs and situation by visiting www.franceslindsay.co.uk or calling us on 01628 634667.capital gains tax, property, separation