· Transfers made before the end of the tax year in which separation occurs are on a ‘no gain, no loss’ basis.
· Where the transfer takes place after the end of the tax year in which separation occurs but before the grant of the Decree Absolute, the parties are connected and any transfer is deemed to be at market value.
· Once the Decree Absolute has been granted, the parties are no longer connected and actual consideration is used to compute any gain.
Separation and divorce are one of life’s most stressful events, and it is probably fair to say that amidst the upheaval the tax consequences of ending the union are not at the forefront of one’s mind! However, where property is jointly owned, tax consequences are unavoidable.
The family home
In any separation or divorce, the family home is likely to be the main asset. Following separation or divorce the home may be transferred to one party as part of the divorce settlement, sold immediately or remain in joint ownership and sold once the children have grown up.
Sale of the family home
The availability of main residence relief means that in most instances no capital gains tax (CGT) is payable on the sale of a family home. A married couple who live together are only allowed one main residence for tax purposes between them. After separation, each spouse is allowed their own main residence. The same rules apply to civil partners.
Each spouse or civil partner is treated as an individual for CGT purposes and each is entitled to their own annual exemption.
If the home is sold prior to the separation, normal rules apply and as long as long as main residence relief is in point, there will be no CGT on the sale of the property. A married couple or civil partners are treated as living together unless they are separated under a court order, they are separated by a formal Deed of Separation executed under seal or are separated in such circumstances that the separation is likely to prove permanent. However, if the marriage or civil partnership has not broken down but the parties live in different residences, they are treated as living together for CGT purposes.
If the property is sold after one spouse or civil partner has moved out, the extent to which any gain on sale is taxable will depend on the timing of the sale and whether the departing spouse or civil partner has elected for another property to be his or her main residence.
If the family home is sold after the departing spouse has moved out, it is still possible to realise any gain free of CGT, as long as the disposal takes place within 36 months of the departing spouse vacating the property, as under the private residence rules if a property has been lived in as a main residence by the taxpayer at some point in its ownership, the last 36 months are exempt. It does not matter whether the departing spouse has elected for another property to be his or her main residence.
If the property is sold more than 36 months after the departing spouse has moved out a proportion of that spouse’s share of the gain will be liable to CGT.
Example 1 – Marital home sold within 36 months
Harry and Helen separate in January 2013 and Harry moves out the marital home, which is put on the market. The home is sold in July 2013. The property has been their main residence since it was purchased in August 1998.
Helen has lived in the property as her main residence throughout. Consequently her share of the gain is fully covered by the main residence exemption.
Harry lived in the property as his main residence from the date of purchase in August 1998 until January 2013. Although he did not live in the property in the period from moving out in January 2013 to the date of sale in July 2013, any gain is fully covered by private residence relief as the last 36 months are exempt and the property is sold within 36 months of Harry moving out.
Tip – if possible, sell the property within three years of the date on which the departing spouse moves out to maximise private residence relief.
Transfer to residing spouse
Rather than selling the marital home, one spouse may choose to remain in the home, particularly if there are children involved. Where one spouse or civil partner transfers his or her share in the marital home to the other party, there are tax implications to consider.
Where one party to a marriage or civil partnership transfers a share in the marital home to the other party, the tax consequences depend on the timing of the transfer.
As noted above, the CGT rules for married couples and civil partners continue to apply until the end of the tax year of separation. This means that where the transfer takes place after the couple have separated, but before the end of the tax year of separation, the transfer takes place at an amount which gives rise to neither a gain nor a loss.
Example 2 – Transfer to residing spouse before end of tax year of separation
Chris and Caroline separate in May 2013. Chris moves out of the family home, while Caroline remains in the home with the couple’s three children. Chris transfers his share to Caroline. The transfer takes place in August 2013.
The house cost £200,000 when purchased. The costs of acquisition were £2,000. Chris incurs £3,000 transferring his share to Caroline.
Chris’ deemed disposal proceeds are as follows:
Cost (50% share) £100,000
Acquisitions costs (50% share) £1,000
Disposal costs £3,000
Deemed disposal proceeds £104,000
Caroline’s base cost for the share transferred to her is £104,000. This is added to her share (£101,000) to give the base cost of the property (£205,000) for any subsequent sale by her.
Although transferring in the year of separation ensures there is no CGT to pay, this will not necessarily give the best result.
If the transfer takes place after the tax year in which separation occurs but before the granting of the Decree Absolute, the parties are treated as connected persons. The effect of this is that regardless of the actual consideration that changes hands, the disposal is treated as made at market value. If full private residence relief is available this can be beneficial as the transferee will end up with a higher base cost. This can be useful on a subsequent sale, if full private residence relief is not available.
As noted above, where a property has been an only or main residence at some point, the last 36 months of ownership are exempt from CGT. Consequently, if the transfer takes place after the end of the tax year of separation and after the departing spouse has left the marital home but during the last three years of ownership, the departing spouse will have no CGT to pay on any gain as it will be fully covered by private residence relief.
The existence of a special relief means that it is possible to make a tax-free transfer after three years. The relief allows the former matrimonial home to be treated as the only or main residence of the departing spouse from the date that his or her occupation ceased until the earlier of the date of transfer or the date on which the spouse or civil partner to whom the property is transferred ceases to use it as his or her main residence. However, as another property cannot be the main residence at the same time, this may not give the best possible result if the departing spouse has purchased another property, particularly if any gain coming into charge would be covered by the annual CGT exemption.
If the departing spouse has purchased another property this relief may not give the best overall result and may be better to elect for the new property to be the main residence.
If the transfer takes place once the Decree Absolute has been granted, the parties are no longer connected and any gain is computed by reference to actual consideration.
Stamp duty land tax is not payable on a transfer arising on separation or divorce.
Consider the timing of a sale or transfer to get the best possible result.
This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.