Separation, Divorce and Second Homes

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For couples facing the breakdown of a marriage or civil partnership, there can be unintended tax consequences of a financial settlement in relation to the ownership of a second home. The impact of failing to obtain early tax and legal advice can be a significant and heart-breaking tax bill adding to the stress of separation. In this blog I explain the key considerations for divorcing couples should either person, or together jointly, own a second home.

Capital Gains Tax and second homes

Spouses or civil partners are able to transfer assets freely between each other without triggering an immediate Capital Gains Tax (CGT) charge on the disposal of the asset (known as a “no gain no loss” transfer). However, the existing tax rules only extend this treatment for the remainder of the tax year in which the couple separate. Transfers made from the following tax year are deemed to take place at market value and taxed accordingly.

In most cases, the marital home will form a significant part of the overall family wealth, but an immediate sale may not be practical or possible. Many divorcing couples keep the shared ownership of a family home due to children still living there, however it is very common for one partner to move in to another property. Where there is a disposal of an individual’s principal private residence (PPR), the gains arising are generally exempt from CGT. However, where a new property is bought or rented the PPR position could change. If the period between an individual moving out of the marital home and disposing of their interest is within 9 months, the full gain on disposal should be covered by PPR relief.

In certain circumstances, it is possible to extend the 9-month period for the departing spouse or civil partner but this is generally only when the marital home is being transferred to the occupying spouse as part of the divorce settlement and the departing spouse has not elected for another property to be their PPR.

The family court can also make orders deferring the gains or creating a lifetime settlement depending on the specific circumstances of the couple and family.

On 20th July 2022 the Government proposed changes to the current CGT in their draft Finance Bill 2022-23 which includes a proposal that a spouse or civil partner who separates and moves out of the family home but continues to retain an interest in it will be able to benefit from PRR when the family home is sold later. You can read more about the government’s proposal and what is means in the context of family law proceedings in this recent blog on CGT.

Jointly Owned Properties and extended PPR relief

Many couples own two or more properties in joint names and on separation each spouse subsequently wishes to live in one of the properties. They can have sole ownership of one property each by exchanging their interests on divorce. Each transferee will need to accept the original base cost and ownership period of the transferor and a joint claim made. It is possible to ensure that no CGT arises for either spouse under the correct circumstances. If each home were to be sold immediately after the transfer, then any gain would be relieved from CGT by PPR relief.

On 20th July 2022, the Government has proposed that separating spouses or civil partners can transfer assets between themselves at no gain or loss at any time within three years after the year of separation regardless of whether they are still living together or not. The assets transferred must be subject to an Agreement or a Court Order.

Stamp Duty Land Tax (SDLT) and second homes

In normal circumstances, the acquisition of a property while also retaining an interest in another one (for example, in the marital home) would give rise to 3% above the standard rate of Stamp Duty Land Tax on any purchase, whether that second property is bought as a home or as an investment. However certain transactions undertaken on the ending of a marriage or civil partnership, are exempt or non-chargeable providing they take place as the result of:

  • A court order or separation order; or
  • An agreement between the partners in connection with the dissolution or annulment of their marriage or civil partnership.

This would include transfers of the marital home between spouses. Therefore, provided any property is transferred between the couple and not any third parties, as part of the divorce agreement, then it should be possible to avoid SDLT charges.

Conclusion

Under new rules, applying to disposals made on or after 6 April 2023, separating spouses or civil partners will be able to continue to make transfers between each other on a no gain no loss basis for:

  • up to three tax years after the tax year in which the couple cease to live together; or
  • an unlimited period where the transfers are made in accordance with a formal divorce agreement or court order.

There will also be special rules introduced for individuals who maintain a financial interest in their former marital home following separation, including the ability for the non-occupying former spouse or civil partner to claim principal private residence relief on a future sale of the property.

This will give divorcing couples more time to reach an agreement on the division of their assets without the risk of an unintended tax bill. Whilst this is positive news, it is still important to take tax advice early to avoid unintended tax consequences and to mitigate tax liabilities.

Trisha Siddique is a Director in our London office. Find out more about her experience and approach here

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