It is essential to consider the tax implications of any financial settlement on divorce, so that there are not any nasty shocks waiting around the corner, just when you think that you have resolved everything.
Indeed seeking advice at an early stage can enable you to take steps to minimise any tax bill, which can only be an advantage for the parties concerned particularly at a time when it is often a challenge to meet both parties’ needs. This month we find ourselves in the new tax year, and there are some important tax changes to get to grips with; we set out those changes concerning capital gains tax that are likely to be of most interest to divorcing couples below.
Principal private residence relief ensures that no capital gains tax is payable on the disposal of a property which has been occupied as your main residence. Essentially this relief means that gains are exempt for any periods you have actually been in occupation, and any periods you are deemed to be in occupation. Previously, for the last 18 months of ownership you would be treated as being in occupation, whether in fact you were or not; this enabled parties who had for example moved out of the family home 18 months in which to sell or transfer their interest in the property without incurring capital gains tax.
However, this period has decreased to just 9 months from 6 April 2020. If you vacated the family home in excess of 9 months prior to you selling or transferring your interest in the property, you may be liable to pay capital gains tax on that disposal.
In addition, it was also possible when selling a rental property that used to be your main home to claim lettings relief for periods that the property had been let out, and then principal private residence as set out above. However it is now the case that lettings relief can only be claimed where you have lived in the property at the same time as the tenant. This is likely to significantly reduce the occasions when the relief can be claimed.
Added to the fact that capital gains tax now needs to be paid within 30 days, it is clear that these new changes could have significant consequences for those who are divorcing. A mere 9 months in which to sell or transfer your interest in the family home is not long at all, and due consideration needs to be given to the tax consequences of any settlement so that one party is not unduly burdened. With the housing market likely to be impacted by Covid-19, it is more important than ever to seek legal advice at an early stage so that these issues can be identified, and a referral made to a qualified tax adviser who can then provide specific advice based on your circumstances.
Fiona is a family law solicitor in our Exeter office. If you have any questions relating to the financial settlement of your divorce or any other family law issue that please do get in touch by email [email protected] or by telephone 01392 421777