A few weeks ago, the government announced plans to support a no-fault divorce. Now, a proposed change in the budget to Capital Gains Tax is set to increase the stress on divorcing couples.
If a divorcing couple decides to sell their main residence as part of the divorce, there is no Capital Gains Tax due. This is called Main Residence Relief. Capital Gains Tax is payable though if one party moved out and purchases another property. The new property would then become their main residence. The person who moved out would liable on any increase in the value of the property from when they moved from their main residence, to when it is sold. If the property is sold within 18-months, Main Residence Relief allows the person to be exempt from this Capital Gains Tax (CGT).
If one party goes into a rented property, they should protect themselves from CGT. To do this, they should write to the Inland Revenue to register their principal place of residence is to remain at the marital home.
The amount of the CGT liable depends on whether the person who moved out is a higher rate tax-payer or not too. A higher-rate taxpayer will be liable for 28% on any increase in property value. A lower-rate tax-payer is liable for 18% on any increase in property value.
An example of calculations can be found here on the government website.
Main Residence Relief cut
From April 2020, that timeframe for Main Residence Relief is to be slashed to just 9 months. This may not be sufficient for divorcing couples to settle the legal and financial aspects of their marriage breakdown. In the event of a case going to trial, there are often delays before the date of the hearing. These delays can amount to 6-12 months, far longer than the new 9-month limit.
Parties who have moved out of the home because of the breakdown in their relationship may be hit by a Capital Gains Tax bill unless they can sell that property within nine months.
This change in Capitals Gains Tax is due to take effect in April 2020.
If you live in a part of the country where the housing market is slow, this will be a problem to divorcing couples. Some houses remain unsold for months where the housing market is slow. So it is better to talk to experts who understand all the implications. They can work through with you the best way to reduce any liability.
Divorcing couples are advised to remain in the family home
It may be financially advisable for divorcing couples to stay put in the family home. But this is often not the answer. This will add to the tension between the parties and could be bad for children.
When Lucy Frazer, the justice minister, pledged in September that the “no-fault” divorce reform was on its way, we thought it was a good thing. Now the government has the intention to increase taxes on divorcing couples that are forced to sell the property.
In London and the southeast, the high rates of stamp duty have depressed the values of more expensive properties. This is gradually spreading to mid-tier homes too. Property experts are not expecting a recovery in these regions until 2021.
If you are concerned about having a Capital Gains Tax bill whilst getting a divorce, then contact Divorce Negotiator.