Property has always been seen as a basis for taxation and although an Englishman’s home may be his castle it can also be very expensive to retain subject as it is to council tax, inheritance tax and, as now seems increasingly likely in the case of divorce or separation, capital gains tax.
Generally speaking a property used as your main home is exempt from capital gains tax. However, if you separate, then, by definition, it is no longer the home of the person who vacates. Needless to say many people choose to sort out the practicalities of leaving first, only to take legal advice months and sometimes years later when they feel ready to face the prospect of divorce.
Whilst most law firms fall shy of giving actual tax advice, family lawyers have nonetheless operated and advised clients with regard to the negotiation of settlements on the basis that even where their client vacated the home, no charge to capital gains tax will arise if it is sold within 3 years of separation. Since the beginning of the new tax year on 6th April, however, there has been no such solace. The period of 3 years has been slashed to 18 months or approximately the length of time it might take to bring a case from beginning to end through court to force a sale of the marital home.
Add to the length of time it could take to obtain a court order, the actual period required to market and then sell a property, especially in my local area where the housing market remains slow, and you will quickly envisage the scale of the problem. Yes, some people who bought in the last 7 to 8 years may actually lose money on a sale or make a notional profit that will be below the threshold for tax, but for others who may have owned for many years the story can be different.
Moreover and whilst the potential liability will fall only on the person who has been out of occupation and of course only apply to their one half of the gain calculated pro rata for the period they have been out of occupation (less 18 months), it will nevertheless affect the overall outcome if the payment of tax due must be provided for from the proceeds of sale before they are divided between a couple. These new arrangements may only have been with us for just over a week but already I am beginning to see cases where there will inevitably be adverse consequences.
Whilst nobody ever wants to encourage anyone to take professional advice arising from their separation before they are ready to do so, when it comes to their home they must seek advice as soon as possible. In the words of Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes.”