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It’s all in the timing: the family home and capital gains tax on divorce

Posted: 19/03/2021

The sale or transfer of the family home at the end of a relationship is inevitable but before consideration is given to how that sale or transfer might be structured into an overall financial agreement, it is essential to consider capital gains tax (CGT).

Transfers between married couples living together do not attract CGT; this includes a transfer of the family home. The position changes however when they separate.

When does separation take place for tax purposes?

Determination of this date can be quite subjective as it is the point at which there were circumstances in which the separation was likely to be permanent. The date is usually set out in correspondence between solicitors and the court forms prepared as part of the divorce process. It is rarely the date that the parties’ decree absolute was pronounced and their divorce finalised.

Why is the date of separation important?

In the tax year of separation, assets can be transferred between spouses as if they remain living together. In these circumstances, no CGT is payable. This rule can lead to some rather extreme outcomes. For example, if a married couple separate on 1 April 2021, they will have until 5 April 2021 (4 days) to transfer assets to one another without attracting CGT whereas if they separate on 6 April 2021 they will have until 5 April 2022 (364 days) to utilise this exemption.

What if the transfer of the family home takes place after the tax year of separation?

In general terms, the transfer of assets between spouses after the tax year of separation will be treated as gifts and therefore liable to CGT. However, the family home attracts a special form of relief known as principal private residence relief (PPR).

PPR allows the absent party, for tax purposes only, to be deemed as occupying the family home for a period of 9 months (prior to April 2020 this was 18 months) following the date of separation. This relief applies irrespective of the date that they moved out. In these circumstances no CGT would be payable.

What if the transfer of the family home takes place more than 9 months after the date of separation?

In many circumstances the period of deemed occupation of the family home for tax purposes can be extended indefinitely. In order to qualify for this relief, all of the following circumstances must apply:

  • the transfer of the family home is made as a result of an agreement between the spouses or an order of the court;
  • from the date that the absent spouse moved out, the family home has continuously been the only or main residence of the remaining spouse;
  • the absent spouse has not elected another property as their main residence for tax purposes, which may be advantageous for them to do if they purchase a new residence.

In circumstances where the deemed occupation of the departing spouse, described above, is not permitted, PPR will still apply although the level of relief will reduce over time. The tapering will start from the expiration of the 9 month period following separation.

What about the contents of the family home?

Most household contents (chattels) with a value of over £5,000 are subject to CGT on transfer unless the transfer takes place within the tax year of separation.

Tax advice

CGT issues can arise in every level of case: from the wealthy to the everyday. It is usually beneficial for both parties to ask for input from a tax law expert at an early stage to flush out any potential tax liabilities and how they might be dealt with in any financial agreement.

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Penningtons Manches Cooper LLP