Separating can be taxing enough without…taxes…
Married couples/civil partners
The sort of tax that applies here is Capital Gains Tax, levied against the person who moves out and subsequently, there is a transfer of property. Ordinarily, the person leaving will be exposed to a percentage tax on the financial gain reached at transfer from the original cost of buying the property.
New law
The government enacted the following provisions on 6th April 2023.
- Allowing up to three years after the date you decide to separate to be exempt from capital gains tax liability.
- Unlimited time if you incorporate your agreement into a formal court order or separation deed.
- You, as a non-occupier, can claim Private Residence Relief after the property transfer has taken place and when your spouse decides to sell.
- If there is a charge on the property representing your percentage interest, to be paid to you at a later date, for example when the property is sold, you will be exempt from paying capital gains tax on the ultimate gain that you have achieved due to the delayed sale.
The purpose of this change in the law is to help you avoid capital gains tax liability which is only fair if your separation encounters lengthy negotiations.
Cohabitees
More and more of us are dispensing with marriage in favour of living together. In the context of CGT liability, the above law reform will not apply.
This is why we always say prospective cohabitees MUST take legal advice when they are looking to share property assets together. CGT might otherwise apply if you have not declared in writing between you how you are going to own the property.
Therefore, a Declaration of Trust (a deed) must be prepared or a written cohabitation agreement, signed and witnessed. This shows the intention of how you wish to own the property because the tax man has to be notified of any disposal of property if the value has gone up and is likely to ask some awkward questions without seeing this agreement.
However, if you do not have one of these, we can instead prepare a cohabitee separation agreement to help you avoid an onerous tax just because you have split up.
Please do call or visit us for a free half-hour consultation if you are worried about any of this or seek clarity on the particular circumstances of your position regarding capital gains tax on separation.