In the sad event of a marital breakdown, the tax implications relating to the family home need to be considered as they can be easily overlooked during such a difficult time.
Separation and divorce, including the dissolution of a civil partnership, involves making difficult decisions especially where children are involved, and often results in one spouse (or civil partner) moving out of the family home possibly followed by the sale of the property. The property may be owned jointly as joint tenants or tenants in common, in which case both have an interest in the property. Alternatively, the property may be in the name of one spouse only, but a court may rule that the other spouse is entitled to a share in the property.
During their marriage a couple can transfer assets, including the family home, between each other tax free. However, a different set of rules apply when a couple separate and this could result in any transfers of assets between them being subject to tax. Different rules apply depending on whether the transfers take place in the tax year of separation, before the divorce is finalised, or after the divorce is finalised. Generally a transfer in the tax year of separation will continue to be tax free, if made before the divorce is finalised. Therefore, a couple who separate in May would have more time to consider their tax position compared to a couple who separate in February.
After the tax year of separation, any transfer of assets are not tax free and could result in a tax liability becoming due.
In respect of the family home, another exemption applies which may reduce any taxable gain for the period the property was occupied as a home, along with the final 18 months of ownership. This final period has recently been reduced from 3 years to 18 months and, therefore, a quick sale could be important to the spouse who has moved out if the eventual sale is to a third party. This 18 month restriction may be avoided if the eventual transfer of the interest in the property to the other spouse is made under a court order.
More importantly, where children are involved in the divorce, the courts can issue what is known as a Mesher order, under which the sale of the family home is delayed until a prescribed event occurs, such as when the children reach the age of 18. This situation effectively creates a trust and, although capital gains tax may be avoided, there could be inheritance tax issues when the trust is wound up by way of the sale of the property, or when the trust reaches its ten year anniversary.
The difficult circumstances surrounding separation and divorce, and the involvement of the courts may limit the tax saving options available, but seeking early tax advice could minimise any potential tax liabilities.
If you would like more advice regarding your specific circumstances, please do not hesitate to contact Rachael Dronfield.
