Spreadsheet Phil, tax and divorce

Wednesday’s budget contained a small surprise for divorce lawyers. The 3% stamp duty surcharge for second homes will no longer apply if the second home is bought by a divorcee who is retaining an interest in the family home occupied by his or her ex.

The law of unintended consequences applied when the government introduced the stamp duty surcharge on second homes. The change, which was designed to help tackle the housing crisis, has the unexpected effect of putting a lot of people who are divorcing or separating in the unhappy position where they might have to pay extra stamp duty to buy their new home whilst being unable to live in what the taxman considers to be their first home.

This is because in some cases, a couple may agree that the family home will not be sold immediately, for example, where there are minor children still living at home. A divorcing couple (having been advised by their solicitors that the court will always put the needs of a minor child first) may have agreed that the wife will stay in the house with the children until such time as she dies, remarries, cohabits or their youngest child reaches the age of 18 or leaves school. These are known as trigger events as they trigger a sale. The husband goes off and buys a new home and then eventually he receives his share of the equity in the house many years later when the first occurring trigger event comes to pass.

The trouble was that the husband was then treated as a second home buyer, and had to pay the higher rate of stamp duty on his purchase.

Such an outcome is clearly unfair and presumably the Chancellor did not intend to lump these people together with people who are planning on buying a second home in the country or an urban pied-a-terre. Therefore, it is good news that the government has taken this on board and said that it does not apply to people who retain an interest in another property due to a divorce.

However, there are other ways in which the Chancellor should also considering changing the tax laws to exempt people who are divorcing or separating:

  • Many people who separate and do not sort out their finances immediately may end up paying capital gains tax on the eventual sale of the matrimonial home or if it is transferred to their spouse. Normally, there is no capital gains tax payable on the sale or transfer of your home as you will qualify for Principal Private Residence Relief. However, if you have not lived in the house for over 18 months, you may lose this relief and have to pay capital gains tax if it is sold or transferred. You may even have to pay it if you transfer it to your spouse as part of your divorce settlement and receive nothing in return; it’s treated as a disposal even through you’ve received nothing in return. This particularly tends to affect people who have a two years’ separation divorce and do nothing about their finances for the time being; by the time they get around to divorcing and sorting out their finances, a tax bill may be unavoidable.
  • Capital Gains Tax on other assets can also be a problem. Normally you can transfer assets to your spouse without incurring a tax bill. However, if you are separated, you have to transfer the assets in the same tax year as your separation. That means that if you separate on 4 April, you then have until midnight the following day to transfer the asset or face a tax bill. Therefore, for tax reasons, it makes sense to separate on 6 April as then you get a full year to reach an agreement or get a court order and then transfer the asset before you have to pay capital gains tax. Divorce is rarely that orderly.
  • Unmarried couples are hugely disadvantaged by not being married. Not only may any inheritance be potentially subject to inheritance tax (whereas as an inheritance from a spouse isn’t), they also may have to pay stamp duty if they purchase their ex-partner’s interest in a property. (I am not sure, but I suspect that the change to stamp duty announced by the Chancellor may only apply to people who are divorcing, not to unmarried couples who are separating.)

There are other ways in which divorcing or separating couples can unexpectedly incur a tax bill and if you are facing separation or divorce, it is worth seeking the advice of a tax accountant as to any possible tax bill.

If you would like to arrange a consultation, please call on 01206 848426 or contact Armstrong Family Law here.

DISCLAIMER: Please note that I am a solicitor, not an accountant. I do not give tax advice to clients, other than to point out the possibility of a tax bill and to tell them that they need to consult an accountant.

 

23 November 2017

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