Capital Gains Tax: why timing matters when you divorce and new changes need to be considered
There are many aspects of divorce, including Capital Gains Tax (CGT), that couples don’t consider in settlements - and it can cost them dearly.
In this in-depth interview, Janette Whiteway, Personal Tax Manager and Associate at Langdowns DFK gives LGFL’s Rita Gupta the inside track on why timing is important in CGT planning, and how it’s changing. Rita interviewed Janette in the stunning, newly opened Heckfield Place, when top tips were shared on tax, shoes and all things important.
RG: Janette, what’s the current position on Capital Gains tax (CGT)?
JW: At present, CGT is paid when a ‘disposal’ occurs. This is when a property is:
- Sold on the open market
- Transferred to another person as a gift
- For consideration at less than the open market value.
Normally, CGT applies to second properties, such as rentals or holiday homes.
RG: What happens when a main residence is sold?
JW: When you sell your main residence, Principal Private Residence Relief (PPRR) is available. There are restrictions on the relief available if the house, garden and grounds exceed half a hectare (which is a little over one acre).
If you live in two or more houses, you can only have one main residence at a time in order to qualify for Principal Private Residence Relief. You can nominate which residence is your main residence for any period, and you must do this within two years of the date you first have that particular combination of properties. If there is a change in the combination of residences, you can kick start a new two-year nomination period.
RG: What are the criteria for defining a main residence?
JW: To begin with, you have to live there, so it’s not just an address. Your kids might go to school locally, you are registered with a local doctor, and you receive important post at the address, such as bank statements. It’s about the intent and quality of your occupation assessed by a number of factors.
RG: What’s the difference between a married couple and a separating or divorcing couple selling a main residence?
JW: When you are married or in a civil partnership and have not separated, you can only have one main residence between you. If you are married and selling the main family home, then this is usually covered by Principal Private Residence Relief, so no tax is payable.
If you separate permanently, you can each have a different main residence. If this is sold, and it meets the criteria for Principal Private Residence Relief, then any capital gain you make from that property would not be liable for Capital Gains Tax.
However, if the sale of the main property takes place after you have separated, as part of the divorce proceedings, then you may need to pay CGT on your disposal. It doesn’t matter if you gift the property or sell it to your ex-partner at less than it’s market value; you’ll still need to pay CGT on the open market value.
RG: So, the separation date is important?
JW: Very important. The date of separation for tax purposes sometimes is based on the court order or a date when the couple have separated on a “basis that is likely to be permanent”, such as one partner moving out and living elsewhere. It is subjective from case to case and person to person.
This date is crucial if you want/need to transfer property. If the transfer is made in the tax year of separation, the transfer is deemed as no loss nor gain. We always advise separating couples to get expert tax advice as to timings, particularly if the value of the house is large.
RG: So, timings are crucial for those with potentially large gains, such as the ‘silver separators’?
JW: Absolutely. Silver separators often bought their homes before 1982, so have seen massive increases in the value of their main residence. Their children have flown the nest, so it’s just them in the home, and usually the house is mortgage free which in the south of England can be of considerable value.
RG: I know that silver separators are often slower to initiate and progress the divorce process.
This can lead to long periods of time after they have left the family home too.
JW: From my own experience, this generation also do tax returns themselves and are not aware of this provision. So it’s particularly important for silver separators to seek professional tax advice early in the divorce process, and certainly well before any financial settlement in drawn up.
RG: Does including a property in a divorce settlement change the CGT position?
JW: To an extent. If the property is included in a divorce settlement or consent order, this transfers the ownership. It is treated as a gift as far as HMRC is concerned.
RG: Who pays the CGT in this situation?
JW: The person gifting the property is liable for the CGT. Even if the property is transferred at nil consideration, the former spouse or civil partner disposing of their share must consider how they will fund the payment of their tax liability.
RG: What happens when one party chooses to move out?
JW: In divorce cases, when one party moves out, the point in time at which they move out is often deemed as the date of separation. When that person moves into a new principal residence whether rented or purchased, the clock starts ticking, with 18 months to complete the sale, transfer or gifting on the original main residence in order to claim the PPRR in full.
RG: I’ve seen how in some cases, the declaration of the DA (decree absolute) is deemed to be the ‘disposal date”
JW: True. The order of events is important.
- If the property is not transferred at date of the decree absolute, and a court order is made before that date, then the decree absolute date becomes the disposal date.
- If a court order is made after the decree absolute, the later court order is the date of transfer.
- If the property is transferred under a court order and the transfer happens before the decree absolute, then the date of transfer is the court order. The disposal date for CGT is the date on which a binding contract of sale is entered into, which can triggered by these events.
That’s why proper advice on timings is so crucial!
RG: What if you need to move out of your main residence quickly, as often happens in cases of domestic violence?
JW: If you have to leave the property before selling or transferring your share, you can claim a period of “deemed occupation”. This covers the final 18 months in which you own a property. In this case, Principal Private Residence Relief would apply to your period of actual occupation PLUS the final 18 months of the ownership, if this is later than the date you move out. The final 18 months of occupation is, in effect, tax free.
RG: That seems a reasonable timescale to sort out the property sales, etc, but it’s being changed in 2020?
JW: Indeed it is. From April 2020, this period of "deemed occupation” will be reduced from 18 months to just 9 months. This means if you leave the property and do not complete on a sale or transfer within a 9-month period from the date you left, a chargeable Capital Gain will start to accrue on the property.
RG: Ouch! That doesn’t seem a lot of time in a slow-moving property market, or for separating parents.
JW: The HMRC’s view is that this 9-month period is twice the length of the average conveyancing transaction. Also, of course, we don’t know yet what the impact of Brexit might be on the property market, such as making buyers cautious.
RG: Let’s explore this a little more, as it seems to me this change could affect a lot of people.
JW: Absolutely. There is a huge risk that people simply won’t be able to complete in time, and given the average house price in our area of Hampshire and Berkshire, the sums involved could be considerable.
RG: I have two major concerns over this.
- The court process cannot be speeded up to accommodate this change. Timescales are set by the court and indeed, with court time scales, there are inevitably delays in the process.
- More importantly, it gives the parties involved very little time to reflect and explore reconciliation. If they are deemed to have separated on a permanent basis, those dates are pivotal and consistent. The clock literally starts ticking and separating couples are going to be feeling the pressure. The timescale might force a decision.
JW: In my personal opinion, this is tax law affecting family relationships, and it shouldn’t. The issue is that tax is an objective calculation, whilst family law is full of subjective shades of grey. That is why the two shouldn’t mix!
RG: There’s also another facet to delays.
If one party decides to create delay deliberately, a consent order could make out the other one is being unreasonable. It will be interesting to see if the courts catch up with that, and order the other to pay the tax.
- This could affect people’s decisions to move out.
- In an abusive relationship, this could put people at risk.
- It will be more difficult for separating parents to focus on the wellbeing of their children.
In some situations, it’s better that separating parents live apart, than share a home with one who is warring. This is not good for the child/children in the middle.
JW: I’m also concerned about the extra levels of stress this adds to an already stressful time. That’s why I really do urge people to take advice, and to think of the timings. It’s a contradiction to many, as it’s emotional decision based on cold hard facts. You need to know the facts before making the decision, and that’s where impartial, professional tax advice can really help.
Sadly, I also think the changes will open up the scope of people making genuine mistakes, through ignorance or simply not understanding the tax implications.
Here’s my advice to minimise that risk:
- Plan in advance and check your timings
- Take advice from an experienced tax expert
- Be proactive so you can make a calculated move, not a reactive one
In short, if you own property, you need to be on top of all those crucial dates.
RG: What happens if you both decide to let your former family home?
JW: Currently, if you have moved out of your former main residence, and then let it, you are eligible to claim Lettings Relief. This is calculated as the lower of the amount of the chargeable gain during the let period, the amount of PPRR already given, or £40k. This is per owner, so you could exempt up to £80k of Capital Gain between the two of you when you finally sell.
However, this is also set to change. From April 2020 Lettings Relief will only be available to those who are in shared occupancy with the tenant. This means that to qualify for the relief, you must actually be living in the property at the same time as it is being let. Broadly speaking, the relief will only apply to owners who have several lodgers living with them at the same time. So any clients who wish to move out with family and rent out the property perhaps to ease some financial pressure will be covered by this.
RG: Yet another impact for separating couples, as that’s not a good scenario with children.
It’s definitely an issue for parties to put into the divorce calculations if they are considering letting.
Anything else changing?
JW: The Finance Act 2019 received Royal Assent in February 2019, which will affect how quickly a Return reporting a residential property gain must be filed with HM Revenue and Customs.
At present, non-UK residents must file a Capital Gains return within 30 days of the sale, whereas UK residents currently file any disposal as part of their Self Assessment Tax Return, which is due by 31st January after the end of the tax year of disposal.
However, from April 2020, the 30-day filing requirement will apply to everyone, with automatic penalties for late submissions. The Capital Gains Tax calculated would also be due at this 30-day point.
This is a major change from the current situation, where the Capital Gains Tax liability is paid to HM Revenue and Customs by 31st January following the end of the tax year of disposal.
RG: With so many changes, what’s your best advice?
JW: Get professional tax advice and get it early! Despite the considerable work that HMRC have done on clarifying tax rules, it is still a complex and confusing world for anyone in the midst of an emotional time such as a divorce.
Keeping up to date with tax changes is a vital part of any tax manager’s job, so please do come and talk through your situation. At Langdowns DFK, we are genuinely happy to help anyone navigate the tax maze, and through working with you, Rita, we have a good understanding of both the legal and emotional implications of divorce.
RG: Early legal advice on any aspect of divorce is also important, so anyone considering separating is welcome to come and talk to me.
We offer a free 30-minute legal advice session so you can meet us, talk to us and see if we’re the right divorce lawyers for you.
Janette, thank you so very much for your time.
JW: Delighted to help.