In most cases the most valuable asset in the divorce will be the family home or the former matrimonial home (FMH) as it is destined to become, if indeed it has not already become the case.

In some divorces, then FMH will have to be sold.  In other cases, one spouse transfers his or her interest to the other spouse, who remains in the property.

It is an article of faith that there will be no capital gains tax payable when one sells one’s home, thanks to the principal private residence exemption (PPR).

Traditionally one has been granted an extension of the PPR, after the home ceased to be the PPR.  This was to allow for a period of time to perhaps sell the property.  It was particularly helpful, in divorce cases, when one party might have left the PPR when the breakdown of the relationship occurred.

Unfortunately the extension has been reduced in previous years.  At one point it was 36 months and then this was halved to 18 months.  In the Budget the chancellor has announced that the PPR will be halved again to just 9 months.

I did just wonder whether Mr Hammond was seeking to incommode Boris in his impending divorce.

This will certainly not be helpful in divorces involving couples where the marriage has been lengthy and they have benefited from the long term rise in property prices.

So what is the problem?  Gift between spouses are regarded as tax neutral.  After separation, a couple can still enjoy the inter-spousal exemption for the remainder of the current tax year.  After that point they are regarded as connected persons and any transfer of property between them would be subject to tax by reference to market value.

The layman will often not appreciate the significance of this.  The thought will be that there would not necessarily be that much growth in the value of the property from the date of separation until such time as the parties go through the divorce process and establish the fate of the FMH and if it is to be sold or transferred to one of the two parties.

Unfortunately that is not how capital gains tax works.  Any gain is judged to arise evenly over the whole period of ownership.  Property will likely show a substantial gain over 20 or 30 years, with no relief for inflation.  If the property is not sold and retained, during a divorce, but one party has left the house, it has ceased to be their PPR.  After 9 months, he or she starts to lose the benefit of the PPR.

Let us assume that the property is subsequently sold.  Let us assume that the whole period of ownership is 25 years.  Let us assume that separation took place after 20 years.  Let us assume that the property grew in value by £300,000 from the date of acquisition to the date it ceased to be the FMH.  The gain is treated as arising over the whole of the period of ownership (25 years) not to the date of separation.  Let us also assume that property prices were stagnant from the date of separation through to the date of actual sale of the property.

Leaving aside issues such as the annual exemption and letting relief, the gain of £300,000 is allocated over the whole 25 years, resulting in a gain of £12k for each year.  We therefore have 5 years where the property was not the matrimonial home.  We can exclude 9 months leaving 4 years and 3 months exposed to CGT.  That could result in a gain of around £25,000 for the spouse who left the FMH when the marriage ran into difficulties.  That could be a CGT bill of over £14,000.

Steps can be taken to avoid this sort of situation.  What is clear though is that any problems with the FMH and capital gains tax are exacerbated by the Chancellor’s announcement.  Exposure to CGT on the FMH needs to be looked at early on in divorce proceedings so that any remedial action can be implemented rather than the parties be confronted by a fait accompli.

We provide capital gains tax computations for our friends in Family Departments.  We also look at SDLT as another emerging pernicious problem but we also aim to come up with solutions to mitigate or eliminate any potential CGT exposure with regard to the FMH.

Please do contact Lucy Orrow or Richard Thomson (or me, in extremis) if there is a divorce case involving a valuable matrimonial home and we can let you know our costs for dealing with the instruction.

Paul Short


Posted by Paul Short 

The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

Lambert Chapman Chartered Accountants

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