Changes to Capital Gains Tax rules on divorce
Associate Simon Willis takes us through the significant implications for divorcing couples due to the changes in CGT on 6 April 2020.
In a previous article for this website (found here) I explained that capital gains tax (hereinafter ‘CGT’) is an issue which often needs to be considered when determining how assets should be divided upon divorce.
In that article I highlighted and signposted occasions when divorcing couples should seek tax advice as regards the potential implications of CGT on their situation.
Since writing that article it has been announced that there will be a change to CGT which could have significant implications for divorcing couples. The change is that with effect from 6th April 2020 the CGT exemption known as ‘Principle Private Residence relief’ will only continue to apply for 9 months after vacating the family home (the ‘final-period exemption’) – a 50% reduction on what was previously 18 months’ grace.
In effect, this means that if a person vacates the family home following relationship breakdown, a chargeable gain may start to accrue against their interest in the property after just 9 months. This does not necessarily mean that a CGT bill will arise (that will depend on various factors including the increase (if any) in the value of the property) but certainly a person caught by this rule should seek advice from a qualified tax advisor. If tax may be payable then that is an issue which should be considered as part of an overall financial settlement.
The implications of this rule change could be significant. It is said to be predicted that the measure will raise £170m over the current parliament.
We see a number of clients who, upon separation, vacate the family home but for various reasons do not deal with (or do not formally deal with) a financial settlement for a number of years thereafter. Beware that approach as, given the impending change to CGT, there could be tax consequences.
Anyone who is going through a separation should obtain legal and tax advice. Unfortunately as lawyers we cannot give you tax advice, but we can help you deal with the legal issues and work together in conjunction with your tax advisor to help try to achieve the best possible outcome for you.
If you are going through a divorce/separation and are concerned that the issues outlined above may apply to your circumstances please feel free to get in touch with our specialist team for a free, no obligation consultation on 01603 610911.
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