Divorce and new tax developments

Divorce and new tax developments

Divorce and new tax developments

Transfers of property between separating couples should take place in the tax year of separation to avoid capital gains tax becoming payable on such transfers.

However, what is the position where a married couple separate, one party remains in the former marital home, the other leaves and the house is subsequently sold? The person who has left the marital home may be liable to pay capital gains tax on his share of the gain.

Up until April 2014 the person who left the marital home had no problems as long as the marital home was sold within three years of the date of separation. However in April 2014 this period was cut short to 18 months.

Not many people are aware of this change and it can cause an unexpected tax liability.

For example, take Phillip and Joanne. They bought a two bedroom flat in London in November 2004 for £400,000. They separated in November 2012. Joanne remained in the marital home and Phillip moved into rented accommodation. They both agreed that the marital home should be sold and that the proceeds of sale should be split 50/50. However the property was not sold until May 2015. At that time, the sale price was £1,220,000. There was no mortgage and after deducting the costs of sale of £20,000 this left a net equity of £1,200,000.

Over a period of 10 years and 6 months, there was a gain of £800,000. As the property had been Joanne’s main residence, she had no capital gains tax to pay on her 50% of the net proceeds of sale. However as Phillip had moved out more than 18 months prior to the sale taking place, he had an unforeseen tax bill to pay in respect of his share of the equity in the property.

Phillip was able to claim the main residence relief for the period of 8 years from November 2004 until he moved out in November 2012 and also for the last 18 months period of ownership (3 years before 6 April 2014). He could not however claim a residence relief for the period December 2012 to December 2013. Calculated on a pro rata basis, a 12 month period over the 10 and a half years, the gain was £38,096. Phillip was able to make use of his annual tax exemption of £11,100 which brought down the gain to £26,996. However as Phillip was a higher rate tax payer, he was liable to pay capital gains tax on that gain at the rate of 28% which left him with an unforeseen tax bill of £7,558.

This example emphasises the need to take into account the tax consequence arising from the sale of the marital home following the breakdown of a marriage. Expert advice is usually needed from an accountant to make sure that the parties are fully aware of all tax implications involved. 

Please call specialist family solicitor Howard Cohen on 0113 320 5000 or email howardc@winstonsolicitors.co.uk for a more detailed look at your situation and to discuss your requirements. 

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