Tax needn’t be taxing – unless you’re a divorcing couple

Are new taxes going to cause issues for divorcing couples?

The Government recently announced plans to support no fault divorce, aimed at alleviating stress for divorcing couples. Inadvertently, Capital Gains Tax changes proposed in the budget are likely to have the opposite effect. Under the measure, which was not mentioned in the Chancellor’s speech, divorcing couples are likely to be hit by a Capital Gains Tax Bill, if they have moved out of the matrimonial home and sell it after 9 months. At present a house owner has 18 months to sell without being liable for a Capital Gains Tax charge.

9 months is unlikely to be enough for divorcing spouses to settle the legal and financial issues of a marriage breakdown. If the case has to go to court then, depending upon which part of the country they live in, there could be delays of between 9-12 months before the final hearing.

To make matters worse, the property market slow down is leaving many family houses unsold for months, and even years.

The changes are due to take effect in April 2020. It is likely that more couples will be advised to stay in the matrimonial home, which is going to add to the tension between the parties, and could be particularly bad for children.

There may also be an increase in applications for Occupation Orders, when one spouse tries to evict the other from the property, which itself will add to tension and expense.

The Chancellor did not mention the new measure in his speech, emphasising instead measures that will squeeze “accidental landlords”. These are landlords letting out properties that they are unable to sell in the current market.  Currently, if a property owner sells a rental property that used to be his or her main home they will qualify for lettings relief of £40,000 (£80,000 for a couple) on any gain from the sale. Under new changes the householder will only be able to claim this relief if they have shared the property with the tenants. The Chancellor’s justification for the new measure is that he wants Capital Gains Tax private residence relief (which allows a house owner to sell their home Capital Gains Tax free) to be limited to homes and not investment properties.

To make things worse, divorcing couples who have split up may be faced with a double tax whammy. There will be a Capital Gains Tax Bill if they cannot find a buyer for their family home within 9 months. However, if either of them buys another property within that period they will also be hit with the 3% second home Stamp Duty Surcharge. Renting a property may also be more difficult, because the Chancellor is increasing the tax penalties on private sector landlords, which may threaten the supply of rental accommodation which in turn will put rents up. Currently more people are renting out their family homes as they cannot sell. If those owners are going to loose Capital Gains Tax relief on their principle private residence, unless they share the property with the tenants, then they may decide not to rent at all.

It’s difficult to see how these new taxes are going to be in any way helpful to divorcing couples, particularly as there will already be a strain on accommodation and finances.  Individuals should seek professional guidance as soon as possible to ensure the best solution can be found.