The final period of ownership of a residential property which was formerly your home usually attracts a run-off period of 18 months. This period of relief is primarily designed to assist when someone buys a new home before they sell their previous one, allowing a period of overlap so that both properties continue to qualify for Principal Private Residence [PPR] relief and are therefore not assessable to Capital Gains Tax (CGT).
From 6 April 2020 the current level of overlap relief of 18 months is set to be reduced to only 9 months and there will be some people affected by this change who will be rushing to complete their property transaction before the relief is curtailed.
Whilst this change may increase the level of CGT due on disposals from Landlords, one possibly unconsidered side-effect of this rule change is the impact that this will have on separating couples and their subsequent divorce.
A married couple can only have one residence that qualifies for PPR relief between them at any time (last 18/9 months notwithstanding). When they split and stop living together, the one who leaves the jointly-owned property will no longer have that former marital home as their only or main residence and will start to acquire relief elsewhere, even though they are still an owner of their former home. At some point later, the divorce and finances are sorted out and the marital home is either sold completely or transferred into the sole ownership of one spouse. Under current rules, the period after departing the home until the interest is sold/surrendered could be as long as 18 months before any form of possible period of chargeable ownership started to accrue. Under the new proposals, any PPR relief for the departing spouse will cease after only 9 months which will mean that it is far more likely – especially if the couple are going through a two-year separation before divorce – that the departing spouse will acquire a period of ownership on the former marital home that is not completely covered by the PPR relief [although in some limited circumstances, they may be able to continue to claim PPR relief on their former home if PPR relief is not claimed on another property].
That is not, however, to say, that there will automatically be CGT to pay for that period of ownership that is not covered by PPR relief.
Any capital gain is deemed to accrue evenly over the total period of ownership and the total PPR relief available is also a time-based relief. Therefore, the amount of gain actually not covered by PPR is likely to be quite small in a lot of cases and most possibly covered by the annual CGT exemption (£12,000 for 2019/20). For example: A married couple split in October 2019 after owning their property jointly for 10 years. The husband moves out and purchases a flat to live in elsewhere. The couple have a two-year separation before divorce whereupon the husband surrenders his interest in the former home to his ex-wife. The property cost £100,000 and upon divorce was worth £220,000. The husband’s share of the gain is (£220,000-£100,000)/2 = £60,000. His qualifying occupation amounts to ten years (120 months) and a further 9 months is covered by the final run-off relief. Total PPR relief amounts to 129/144 months x £60,000 = £53,750 (144 being total number of months of ownership). The final assessable gain is £60,000 – £53,750 = £6,250 which is amply covered by the annual CGT exemption in this example (assuming that it has not been already used against another capital gain). So, no CGT tax payable and the end of the story?
Not quite. Although in this example and possibly the majority of cases there could be little or no CGT actually payable, tax legislation states that a disposal of residential property that is not completely covered by PPR relief has to be reported on a Self-Assessment Tax Return when the disposal proceeds exceed certain declaration thresholds (£48,000 for 2019/20). In the above example, the proceeds amount to £220,000/2 = £110,000 and the husband’s disposal would need to be reported.
The result is potentially an increase of people having to register for Self-Assessment to declare to HMRC the disposal of their former home for little or no CGT payable, increasing the administration involved in what is already a very difficult time.
So unless the rules on formal declarations of CGT are relaxed, this time the unexpected consequence of the Budget proposal is that divorce has just got a little more taxing.