Selling your matrimonial home after separation: proposals to shake up Capital Gains Tax
From 6th April 2023, divorcing and separating couples will have up to three years to transfer assets between each other without incurring Capital Gains Tax (CGT), and fewer restrictions on claiming Private Residence Relief (PRR).
CGT is a tax payable on gains you make when you sell certain assets, including property. You do not need to pay CGT when the property is your only or main residence, nor is there any tax to pay when assets are transferred between spouses or civil partners – such transfers are treated as at a “no gain, no loss”.
When spouses or civil partners separate however, “no gain, no loss” treatment is only available on transfers made in the remainder of the tax year in which separation occurs – depending on when in the year they separate, this may be a very short time. After that, transfers are treated as normal disposals and therefore subject to CGT. This may have a significant impact on financial settlements on divorce.
For couples in the middle of, or contemplating, separation or divorce, these time pressures may add to the stress and worry they are already going through and create extra tension between them. They might be presented with a hefty, unexpected tax bill if they don’t plan carefully or manage to sell in time, and with a volatile, overwhelmed property market, timescales are impossible to control or predict.
It is quite usual for separating couples to have stopped living together. It could be that one party remains living in the family home, and the other rents or buys elsewhere, or the parties could decide to rent their family home and live with parents for example. It is important to consider PRR when deciding on the arrangements, as this could lead to a CGT liability. For example, if one party moves out of the family home and it doesn’t sell within 9 months, they could find themselves having to pay CGT that wouldn’t have been due, had they stayed.
What are the proposed changes?
In July, the Government published the draft Finance Bill which proposes to shake up these rules and allow couples more time to plan and make transfers.
From 6th April 2023, separating spouses and civil partners will get up to three years after the year they stop living together to transfer assets at “no gain, no loss” between each other, and unlimited time when the assets are transferred as part of a formal divorce agreement.
Plus, where a party retains an interest in the family home but doesn’t reside there (to enable the children of the family to remain living there for example), they will still be able to claim relief from CGT. The Government has also proposed that, if the spouse who retains the interest is later entitled to some of the net proceeds of sale, they get the same tax treatment at completion as that which would have applied when they transferred their interest.
What does this mean?
We are living in uncertain times: we cannot be sure either that the Finance Bill will receive Royal Assent, nor that the forthcoming Budget will not change these plans. But if you are:
- contemplating separation or divorce,
- considering transferring your interest in your former family home, and
- you think these proposals may impact you,
you may wish to consider your options and, in particular, the timing of any transfers.
- If you require legal help or advice, our experienced family law team are here to assist you so please do contact us on 0118 951 6200 and ask to speak to a member of our Family team. We can also point you in the direction of specialist tax advice, if you need it.
- If you would like any further information or advice relating to divorce or family matters, our Family & Matrimonial team would be delighted to assist.
Article contributor, Bethan Chant, Graduate Apprentice Solicitor