Married and divorcing couples, including civil partners, should be alert to change to the capital gains tax (CGT) rules on private residence relief.
Tax is never at the top of the agenda when a relationship ends, yet the tax consequences can be far-reaching. A jointly-owned family home is often the most important asset when couples divorce. But for many practical reasons, its value isn't always rapidly realised, and for divorcing couples, the reduction in the CGT final period exemption for property disposals on or after 6 April 2020 could have considerable impact.
The final period exemption gives a useful extension to the time available to dispose of a property that has, at some time, been the main private residence. It can be particularly relevant in a marriage breakdown, where one party moves out of the family home. Hitherto it has given an 18-month grace period. Someone buying a property as a new main residence, before disposing of the old, could obtain private residence relief on the original home for the last 18 months of ownership, even after moving out.
But from April, the final period becomes nine months, giving less time to sell before a CGT charge could arise. Where higher rate taxpayers are involved, this could mean a tax rate of 28% applies. Also from April, new requirements to report and pay CGT within 30 days of completion have the potential to add to the financial strain of divorce.
HMRC treats spouses and civil partners as living together unless separated under court order; by a formal Deed of Separation executed under seal (this should be witnessed in Scotland); or in circumstances such that the separation is likely to be permanent. Whilst living together, a couple can only have one residence to which private residence relief pertains. Following separation, it is possible to obtain relief on a different property.
There is a concession for divorcing couples, where one party moves out of the family home. It can extend the final period exemption, but only where an interest in the family home is transferred to the other party as part of the overall financial settlement on separation, divorce or dissolution. If transfer takes place outside the final period exemption window, full private residence relief would be normally be lost. Here it can be extended to the date of transfer, or date that the recipient spouse ceases to use the property as their main residence – whichever is the earlier. A tax claim must be made for this treatment to apply. It will not always be advantageous, as the spouse moving out cannot then get relief on any new purchase for this period.
Where one party moves out and buys another home before disposing of their interest in the family home, for example, there is also the fact that higher rates of tax are paid on the purchase of 'additional' property throughout the UK. Although in some circumstances, a refund can be claimed on sale of the previous main home, the impact in terms of cash flow can be significant. To discuss tax and marriage breakdown more fully, please do not hesitate to get in touch.
Whose main residence?
A further change from 6 April 2020 will also affect married couples and civil partners. Where property is transferred between spouses, the receiving spouse will always take on the other spouse's history of use of the property. At present, this only happens if the property is their main residence when the transfer takes place. Due to the tax free transfer rules between spouses, this can produce anomalous results where a property has been the main residence of one, but not both, spouses in the past. The new rule may significantly affect the amount of private residence relief available to spouses following such transfers.
The new spousal rules will impact different people in different ways, and we would recommend bespoke advice, tailored to your circumstances. It may be that transfer before 6 April 2020, under the old rules, or after 6 April, under the new rules, produces the best results for you. We are happy to advise on optimal timing.