Sarah Bradford examines the capital gains tax implications of a sale or transfer of the marital home on separation or divorce.
When a couple separate or divorce, this usually results in a change in the couple’s living arrangements. The marital home may be sold, with both parties buying new homes from their share of the proceeds; or one party may decide to remain in the marital home, buying the other party out.
Where children are involved, the couple may come to an arrangement whereby one parent remains in the home with the children until the youngest child is (say) 18, at which time the property is to be sold and the proceeds divided between the parties.
When looking to sell or transfer an interest in the marital home, the capital gains tax (CGT) implications need to be taken into account. Recent changes in the law, reducing the final period exemption for private residence relief to nine months, and the need to report and pay CGT on chargeable residential gains within 30 days of completion, provide added time pressure in an already stressful situation.
Special rules for married couples and civil partners
A number of special rules apply for CGT purposes to spouses and civil partners while they are living together. In particular, any transfers between them are made at a value that gives rise to neither a gain nor a loss. This rule prevents a CGT liability from arising when an asset is transferred from one partner to another. The transferee spouse or civil partner assumes the transferee’s base cost (being treated as if they had acquired the asset when their partner acquired it, at the cost to their partner).
Also, spouses and civil partners are only allowed one main residence for CGT purposes between them.
When a couple separate or divorce, they lose their special CGT status. Any transfer of assets that takes place between them after the end of the tax year in which they separate, in circumstances such that the separation is likely to be permanent, takes place at market value. The parties are treated as connected persons. This means that there may be a CGT liability for the transferee depending on the nature of the asset and the availability of any exemptions, while the transferee’s base cost is the market value at the date of transfer rather than their partner’s historic acquisition cost. However, any transfers between them which take place after the date of separation but before the end of the tax year in which the separation occurs continue to benefit from the no gain/no loss rule.
Once a couple have separated or divorced, they are each entitled to their own main residence for CGT purposes. However, if either or both parties acquire a new residence before the sale or transfer of the marital home, they will need to decide which property is their main residence. This may have CGT implications on the sale of the main residence (or of one partner’s interest in it).
Selling the marital home
A couple may need or want to sell the marital home following a split so that they can both have a new start. From a CGT perspective timing can be crucial, particularly if they have acquired new residences prior to the completion of the marital home, or moved to live elsewhere.
Private residence relief is available to shelter the gain arising on the disposal of a main residence. It applies for the period for which the property was the couple’s only or main residence and for the final nine months of ownership. Where a couple both remain in the marital home until it is sold, buying new residences with the proceeds once the sale has completed if the property has been their main residence throughout, there should be no CGT to pay; private residence relief will shelter any gain arising.
Example 1: Sale of residence post-separation: Full private residence relief
Helen and Hector decided to separate in January 2021. They put their marital home on the market and continue to live in it until the sale completes in May 2021. They have lived in the property as their only or main residence since they acquired it in 2004. They each buy a new home from the proceeds, the sales completing on the same day as the sale of the marital home.
In this situation, private residence relief is available in full, and there is no CGT to pay on the gain on the sale of the marital home.
However, problems can arise if either or both parties acquire a new main residence before the sale of the marital home has completed. This can create pressure to complete the sale within nine months of the new main residence being acquired to prevent any of the gain falling into charge.
Example 2: Don’t delay?
Susan and Simon separated in summer 2020. They put their main residence on the market. Simon buys a new main residence, moving out when the sale completes on 1 September 2020, electing for the new property to be his main residence from that date. Susan remains in the marital home until the sale concludes, completing the purchase of her new home on the same date.
The couple purchased their home on 1 December 2011, realising a gain on the sale of £1.2 million.
Private residence relief applies for the period that the property is lived in as the only or main residence and the final nine months of ownership. As long as the sale of the main residence completes by 1 June 2021, both will benefit from private residence relief in full, and no CGT will be due.
However, if the sale is delayed until (say) 1 March 2022, Simon will be subject to a CGT bill. The couple will have owned the property for 123 months. Simon qualifies for private residence relief for 114 months (i.e., the 105 months he lived in the property, plus the last nine months of ownership). A gain arises on the remaining nine months of ownership. This equates to £43,902 (i.e., 9/123 x £600,000).
Susan will have no CGT to pay on her share of the gain (i.e., £600,000) as the property has been her main residence throughout.
This rule will put pressure on for the sale to complete within nine months and, if delayed, will disadvantage the partner who moved out.
Transfer of ownership
Instead of selling the former home, the couple may agree that one of them transfers their share in the property to the other, or the court may order such a transfer as part of the divorce settlement. Where one party has moved out, the transfer may give rise to a capital gain if it takes place more than nine months later. If the transfer takes place after the end of the tax year when the couple separate, the market value is used to calculate the gain, rather than any actual consideration.
However, tax law allows the departing partner to continue to treat the marital home as their main residence until the earlier of the date of transfer or the date on which a new residence became the main residence. Where a new home is purchased, it may be beneficial to delay electing for the new home to be the main residence to take advantage of this rule.
Example 3: Whether to make a main residence election
Julie and John agree to separate in July 2019. John purchases a new home and moves out in December 2019. The marital home is transferred to Susan in June 2021.
As long as John does not elect for his new home to be his main residence prior to the transfer of the marital home in June 2021, he will benefit from private residence relief in full on the transfer. However, any gain arising on the new home between December 2019 and June 2021 would be a chargeable gain.
Whether this is beneficial or not will depend on the extent of the gain on each property and the availability of the annual exempt amount.
Practical tip
Separating and divorcing couples should consider the CGT implication of selling or transferring their share in the marital home. Timing can be critical, and failure to take this into account may prove very expensive.
