Avoid the tax trap hidden in the Budget that will hit divorcing couples who sell the family home

In the best and worst of Budget traditions there is often one change tucked away in the small print which might go unnoticed until it’s too late. 

This year proved no exception with a change to the rules on capital gains tax on property. 

The Chancellor Philip Hammond revealed he would half the relief awarded to accidental landlords selling up a property that had previously been their permanent private residence – home, in other words. 

At the moment, individuals who move out of their home but don’t sell it immediately have a window of 18 months during which time, the proceeds from a sale are exempt from capital gains tax. 

From April 2020, this window will half, leaving those who struggle to sell their previous home after they move out just nine months to exit before having to stump up capital gains tax to the Treasury.  

While it has been pitched as a further crackdown on landlords, the new rule is also likely to affect divorcing couples.

We asked Emily Kozien-Colyer, a solicitor at Goodman Derrick, to explain what the options are for divorcing couples who may find themselves hit by the changes. 

Emily Kozien-Colyer of Goodman Derrick

As of April 2020, individuals will have only a nine-month window within which to sell their main residence, after they have moved out, before they potentially become liable for capital gains tax. This contrasts with the current window of 18 months. 

This relief period was initially put in place as recognition of the fact that selling a home is often fraught with difficulties and that it is not unusual for property owners to become accidental landlords when a sale falls through. 

It has also provided divorcing couples with some breathing space, particularly if, as is very common after separation, they live apart but continue to own the family home jointly.

Under the new proposals if a husband or wife moves out of the family home because of a relationship breakdown, a capital gains charge may be generated unless the property is sold or transferred within a nine-month timeframe. 

Special rules apply if the family home is sold or transferred between spouses, even after they have separated, provided that they have lived together within the tax year that the sale or transfer takes place.

The new nine-month timeframe may not be enough for warring spouses to agree upon the key financial and practical issues of a divorce, as well as to sort out the legalities.

Can we avoid being hit by the new rules? 

For most separating couples, the family home is likely to be their most valuable asset. The decision of what to do with the house will therefore be crucial. So, what are the options? 

One option is that one spouse gets to keep the house – in London and the South East, it is not unusual for a family home to be worth around £2million, and can often be considerably more.  

The high level of stamp duty on this type of property means that it is often difficult for couples to sell up and buy two cheaper properties. Provided that the family’s financial circumstances allow for it, it is therefore not unusual for the house to be transferred into the sole name of one spouse. 

The other spouse is likely to be the higher earner and able to buy another property with the help of a mortgage.

For most separating couples, the family home is likely to be their most valuable asset 

There’s also the option of the Mesher Order. In this situation, the court will rule that in the interests of the children, the parent who is primarily responsible for their care can remain in the family home until the youngest child reaches the age of 18 or finishes education. 

At this point, the property must be sold and the net sale proceeds distributed between the parties.

The house can also be divided into two – in theory this might be able to work if a family has a large property. In reality, divorcing couples are unlikely to wish to face the complexities involved in agreeing and managing a building project.

One other option is what is known as a ‘birds nest’ arrangement. This option provides that the children remain in the family home and the parents rotate between this and a much smaller property. 

Such ‘birds nest’ co-parenting arrangements have become popular in the US. But although in theory a birds nest co-parenting arrangement could provide the children with consistency and minimal disruption it is likely to be very difficult to work in practice.

Divorcing couples have a range of options to consider when deciding what to do with the family home. As well as being mindful of the financial implications, considerable thought needs to be given to the practicalities.