Going through a divorce is always an upsetting and difficult time for all parties involved – and the last thing you want to worry about is an unexpected tax bill. Unfortunately, if you have multiple assets like properties to your name, you may need to pay capital gains tax during or after your divorce.
Reliefs are available to limit your tax exposure, but understanding the basics around capital gains tax in divorce is critical to avoid paying too much tax. This way, you can move on with your life without worrying about burdensome taxes.
Here’s everything you need to know about selling a house after a divorce – and whether you’ll be liable to pay capital gains tax or not.
There are several reasons why divorcing spouses might choose to sell a house, aside from it being a way to bring emotional closure to the separation.
Divorces are expensive, and each party may be unable to afford to buy the other out of the family home. In this case, selling the house and moving on is often quicker and simpler to give a fair distribution of the home’s equity.A Financial Remedy Order from the courts may dictate that the house needs to be sold for one of the parties to receive a lump sum payment to support themselves. This is often the case when one spouse doesn’t work while the other has an income. The courts will also do this if they think it’s in the best interest of any children under 18 involved in the divorce.
There may also be debts to settle with the divorce, in which selling property is necessary to pay off the settlement. Whatever the situation, selling the house during a divorce is a uniquely personal circumstance often driven by the desire for a fresh start.
Capital Gains Tax (CGT) is a tax on the profit when you sell or dispose of an increased value asset. It’s the gain you’re taxed on, not the total amount of money you receive. CGT applies to anything considered of value, including property.
The CGT levels vary depending on how much income tax you pay. If you’re a basic rate taxpayer, you’d need to pay 10% on any assets and 18% on property. For higher-rate taxpayers, it’s 20% on assets and 28% on property.
Individuals have an annual exempt amount, below which capital gains are not taxed. This is currently £12,300 per person. While you’re married and own assets together like a second home, the CGT allowance doubles to £24,600. The assets can be transferred to either spouse to make the most of this enhanced tax relief.
The rules around divorcing couples and CGT recently changed. As of 6 April 2023, separating spouses or civil partners will be given up to three tax years after the year they stop living together to sell the matrimonial home and any other properties so they can make a ‘no gain, no loss’ sale.
That means the couple can transfer assets, including property, without CGT implications for three tax years. The tax year runs from the 6 April to the 5 April the following year.
The new rule simplifies things for divorcing couples who don’t have to deal with tax issues while transferring assets between them during the separation. However, it doesn’t mean you’re exempt from CGT later if you sell the house in the future.
If you’re confused by the new rules or need a helping hand, you should speak to a tax professional to avoid getting caught out and paying more tax than you need to.
Whether or not you need to pay CGT on a house sold during a divorce largely depends on your financial circumstances and any applicable reliefs. If you transfer the house to your ex-spouse as part of the divorce settlement, the ‘no gain, no loss’ rule typically applies, meaning there’s no immediate CGT to pay.
You might also qualify for the Private Residence Relief, which can eliminate any tax due when the main family home is eventually sold. Some exceptions are involved, such as if you ever rented out the property in whole or in part, how much land there is and if the property ever involved business use.
The timeframe also makes a difference. The new rules allow for a three-tax-year grace period, but you may be liable for CGT later down the line once the time has passed, especially if you own more than one house. If you’re worried, speak to a tax professional to help clarify your position and which reliefs you qualify for.
A court order might also heavily impact how the assets are treated in divorce. You should speak to your lawyer to understand if there are any special circumstances attached to the divorce settlement.
There’s no straightforward answer to who gets the money from a house sale during the divorce, as every relationship and its financial situation is unique – for example, whether it was owned in a joint tenancy or a tenancy in common.
Typically, a house sale’s proceeds for a divorcing couple are split down the middle. If the divorce is acrimonious, a court may need to get involved and determine the split of the proceeds for the couple.
Any mortgages on the house, selling costs and joint debts are usually settled before diving the proceeds. If any children are involved, their needs and concerns are also considered and could influence how the proceeds are split.
If you have a pre-nuptial agreement in place which dictates how any assets should be divided, this will be taken into consideration by a judge. A pre-nuptial agreement isn’t legally binding but does carry weight during divorce proceedings. Given the complexities involved, it’s crucial to consult with legal and financial advisors to understand the applicable laws and navigate asset division fairly and lawfully during a divorce.
Please contact We Buy Any Home if you want to sell your house quickly during a divorce.