It was perhaps too much to hope for that the Chancellor of the Exchequer might have found room in his budget to make changes to taxes that unfairly affect those who are divorcing and separating. The need to address the threat from COVID 19 and Brexit clearly dominated the Treasury’s thinking.
These taxes unfairly affect people who are going through divorce and separation, often at a time when they are already under acute financial pressure.
Capital Gains Tax (CGT) is increasingly a problem, particularly in relation to a couple’s home. Normally, no CGT is payable as a result of selling your home or transferring it to someone else as the owners can rely on private residence relief. However, the problem is that CGT can be payable once you have not lived at the property for a period of 18 months.
This affects a lot of people who separate. Often people leave it for many months, or sometimes even years, before they start to sort out what is going to happen about the house. There may be entirely sensible reasons for this. A wife may not be in a position to buy the husband’s interest in their property immediately, or a couple may decide that they don’t want the children to have to move house until they are older.
The trouble is that when these people seek legal advice, they are advised that there may be a capital gains tax bill when the house is sold or if they are going to transfer the house to their ex because they haven’t lived there for 18 months.
This problem is going to be come even worse from April 2020; in the 2019 budget, the then Chancellor announced that the 18 month grace period was to fall to only 9 months. Given that most divorces and separations take about a year to run their course, this means that capital gains tax is likely to become an issue in most cases where there is a house.
This is a problem for clients who have remained living in the house after the separation. While they won’t have a tax bill if they sell the house or transfer it to their ex, the ex is nevertheless likely to argue that the unexpected tax bill needs to be factored into negotiations.
There are also capital gains tax implications inn relation to other assets, whether they be second homes, businesses, investments or other assets. If those assets are to be transferred by one spouse to another as part of a divorce or separation, then it is essential they are transferred without delay. This is because the CGT rules require the asset to be transferred before the end of the tax year in which the couple separate. It can take months, even years, to negotiate an agreement so this can be significant problem. For tax reasons, it is probably not a good idea to separate in, say, late March given that the rules say that the asset must be transferred before the end of the tax year on 5 April if you want to avoid a CGT bill.
Stamp Duty (or to use its proper name, Stamp Duty Land Tax) is also a problem in cases where cohabitants are separating.
There is no stamp duty payable as a result of a matrimonial home being transferred between spouses as a result of a divorce or separation. The same applies to couples who are dissolving a civil partnership. Unfortunately, this exemption does not apply to unmarried couples who have not entered into a civil partnership. Therefore, if a cohabiting couple agree that the house will be transferred from one party to the other, the party who buying the ex out of the property will have to pay stamp duty. This is calculated on the value of the consideration that is paid (i.e. the value of any sum paid) and on half the value of the outstanding mortgage.
All of this demonstrates the need for people who are separating to seek legal advice from a solicitor (and also where necessary tax advice from an accountant) as early as possible so that they can plan accordingly.
14 March 2020
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