Do I have to pay capital gains tax on home I left during my divorce?

I recently went through a divorce and our marital home is nearing the completion stage of the sale.

I’ve been keeping my half of the mortgage payments, even though my ex has stopped paying her share.

Because of the situation and atmosphere, I moved into a friend’s guest room a little over a year ago, and I pay him for this use.

But I do go back at least once a month, because I still have some stuff there.

We bought the house about 18 years ago for £225,000, there is an outstanding mortgage of about £125,000, and we sold it for £425,000. Equity is divided equally.

I am retired. Do I have to pay capital gains tax?

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Heather Rogers replies: I’ll explain how capital gains tax works when it comes to real estate, and what happens in a divorce where one partner leaves the parental home to live elsewhere.

There are some important new rules regarding CBT and divorce from April, which I will also review below.

How is capital gains tax applied to real estate?

When we sell our own home in which we live ourselves, no CGT is normally due as the alienation falls under the ‘private home deduction’.

It can only be claimed on one home at a time: the main home.

If you have more than one home, you must tell the tax authorities which of the homes is considered the principal residence. This is more technically referred to as making a formal election to HMRC.

You can check your eligibility for PRR here.

However, there are some exceptions where full PRR may not apply:

– You have chosen to claim PRR for another property, as you no longer live in the property you just sold

– You rented out the house in whole or in part (not including tenants)

– You used the house fully or partly for business purposes

– You bought it for profit

– The land including the building is larger than approximately 5,000 square meters.

If the full PRR is not available, you may have to pay CBT. See the box on the right for the rates.

What are the PRR rules if you are getting a divorce?

Divorce can affect the availability of PRR and give rise to unexpected tax liabilities. I’ll explain what happens in the two main scenarios, the first of which seems to apply to you based on what you’ve told me.

A couple gets divorced and the house is sold

The house is usually the largest asset the couple owns and so the house, or the proceeds from the sale, makes up the bulk of the settlement when they divorce.

If the property is sold, the proceeds are often split equally between the parties as part of their financial settlement agreement.

If both parties have continued to live in the property until it is sold, then both can claim the full PRR on their share.

If only one has remained, the party that remained in the property until the sale date can claim full PRR.

If the sale of the property takes place within nine months of the departing spouse leaving the family home, their gains are exempt from CGT.

If the full PRR cannot be claimed, CGT will be payable for the portion of the winnings not covered by PRR.

The annual capital gains exempt amount can be used against these gains – currently £12,300, but this will drop to £6,000 from 6 April 2023 and £3,000 from 6 April 2024 – provided it has not been used for other gains.

Any unused capital losses carried forward from previous tax years can also be settled.

One partner transfers his share of a home to an ex-spouse in the financial settlement

A special extension of PRR may apply when one spouse moves out of the matrimonial home and transfers their interest in that home to the other spouse who continues to occupy the property.

It applies under these circumstances:

– There is a court order or other agreement

– No other home becomes the main residence of the departing spouse or registered partner

– The house in question remains the main residence of the spouse or registered partner left behind.

If these conditions are met, the departing spouse or registered partner will still receive an exemption for private residences from CGT for the period from the move to the moment of transfer to the other party.

What About CGT on Other Assets in a Divorce?

Transfers of property between spouses are exempt from CGT and this exemption remains available until the end of the tax year in which the couple separates.

Thereafter, power transfers between the couple take place at market value, as opposed to the ‘no gain no loss’ principle.

You are considered separated from your spouse or civil partner for CBT purposes if this occurs:

– By a court order or formal deed of separation

– In such circumstances that the separation is likely to be permanent.

If you are neither married nor in a registered partnership, you cannot transfer assets between you according to the ‘no gain no loss’ rules.

What are the new CGT rules for wealth transfers between divorcing couples?

These will arrive on April 6, 2023. Couples separating or divorcing are given up to three years from the year they separate to make no gain or no loss transfers of assets between each other, meaning no CGT would be must be paid.

There are also changes extending the PRR for a departing spouse, which will be welcomed.

You say you’re divorced, but it’s not clear what stage you’re at in terms of financial settlement, so it’s worth checking with your lawyer to see if you can take advantage of these new rules.

>> Divorcing couples should ‘pause’ wealth transfers to take advantage of new capital gains tax rules from April, experts say

Is CBT due in this case?

The information you provided shows that you and your ex-spouse jointly own the home, that the sales proceeds are shared and that you have lived elsewhere for more than a year.

Since the maximum time you may extend the PRR in these circumstances is nine months, a small taxable gain may accrue on the disposal of your share of the property, as not all of your gain will be covered by the PRR.

If the gain is not covered by your deduction, or if you used the deduction for other capital disposals in 2022/23 and you have no losses to offset, you may need to pay CGT.

But check with your attorney about the impending CBT rule changes in divorce, in case you could benefit.

You must make a declaration to HMRC if not all of your winnings are covered by PRR. Find out what to tell HMRC here.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, estate tax, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, please email her at taxquestions@thisismoney.co.uk.

Heather will do her best to answer your message in an upcoming monthly column, but she won’t be able to reply to everyone or correspond privately with readers. Nothing in her answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

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If Heather can’t answer your question, so can you read more about help with tax matters here, including resources for free professional advice if you are older and/or on a low income.

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