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Beware – Moving Out Can Trigger A Capital Gains Tax Trap On Separating And Divorce

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Separation and divorce is stressful and costly – emotionally and financially – but many couples are unaware of the tax traps which can be triggered. This situation will worsen after 6 April 2020 when the new tax year brings a change in the rules.

A family home is often the most valuable asset a couple will own. Under normal circumstances, a sale of the house will not give rise to Capital Gains Tax (CGT) because private Residence Relief applies.

The situation changes when a couple separates. The new rules from 6 April 2020:

* Cut the time by which a person has to sell their interest in the home to 9 months before a tax bill is activated (currently 18 months).
* Require tax to be paid within 30 days, even where no money has changed hands (currently not payable until 31 January following the end of the tax year in which the CGT liability arises).

Changes in Lettings Relief will also affect couples who have let a house which was previously their family home. Currently, Lettings Relief covers capital gains of up to £40,000 (£80,000 for a couple who own a property jointly). This is being abolished from 6 April 2020, unless the property is in shared occupation with the tenant.

What will these changes mean?

* If a property has increased substantially in value the potential CGT liability may be sizeable. Even though the tax may only be payable by the person who has moved out of the house, it is a liability which has to be taken into account on the matrimonial balance sheet before the assets are divided. This will be a potential problem for both of the separating spouses, who will bear an equal liability in the matrimonial accounting exercise. It also may give rise to significant tax liabilities crystallising, which will have to be met from matrimonial assists.

* Separating couples will need to take advice about possible options, including the timing of any sale, occupation of the property (or properties) and transfers between spouses to
maximise allowances.

* If a spouse leaves the family home without considering the possible options and con sequences, they can unwittingly precipitate a substantial tax bill which could have been avoided.

* Any mortgages and step duty land tax can be complicating factors.

Seek professional advice from our experienced and specials team of family lawyers, who can help you navigate this complicated scenario and secure the necessary expert help.

Call to speak with us on 0121 248 4001



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