Divorce and the former marital home

Divorce is emotionally challenging enough without the added complication of tax implications. When it comes to the family home, many people don’t realise there are significant tax considerations that can affect both parties. Whether you’re selling, transferring ownership, or continuing to live in the property, understanding the tax position is crucial. At Severn Accounting, we’ve helped many clients navigate this tricky territory, and we’re keen to share some practical guidance.

Principal Private Residence Relief and Your Family Home

The good news: if your home qualifies as your principal private residence (PPR), you’re typically exempt from Capital Gains Tax (CGT) when you sell it. This applies regardless of how long you’ve owned it or how much it’s appreciated.

However, the rules become murkier during and after divorce. If you separate but both parties continue to live in the property, HMRC will generally only recognise one person’s PPR exemption at a time. If you’ve moved out but your ex-spouse remains, they’ll typically receive the relief, not you. This can create a significant tax liability if you later sell and the property has increased in value during your absence.

The timing of a sale matters enormously. If you can sell whilst you still qualify for PPR relief, that’s preferable. We’d recommend taking professional advice before you move out of the marital home, as a few months’ difference could mean the difference between a tax bill and no tax bill at all.

Transfers Between Spouses: The No-Gain, No-Loss Rule

One silver lining: transfers of assets between married couples (or civil partners), including the family home, occur on a “no-gain, no-loss” basis under section 58 ITA 2007. This means neither party triggers a CGT liability simply by transferring ownership.

However, this relief applies only to married couples and civil partners—not to divorcing couples where the decree absolute has been granted. Once you’re officially divorced, the relief no longer applies. This is why the timing of property transfers during the divorce process is critical.

If your settlement agreement requires one party to transfer their share to the other, do this before the decree absolute is finalised. If it happens afterwards, the transferring spouse could face an unexpected CGT bill based on their share of any gain made since purchase. At Severn Accounting, we’ve seen clients caught out by this, so we always stress the importance of co-ordinating your legal and tax timings.

Selling the Marital Home Post-Divorce

If you sell after the divorce is finalised, CGT becomes a real concern for the spouse who no longer qualifies for PPR relief. For the 2024/25 tax year, CGT rates stand at 20% for higher-rate taxpayers and 10% for basic-rate taxpayers (with certain rates at 24% and 12% respectively for residential property disposals, depending on the disposal date and circumstances).

Even with a modest property gain, you could face a substantial bill. For example, if a property has appreciated by £100,000 since purchase and one spouse no longer qualifies for PPR, a 20% CGT liability means £20,000 owed to HMRC. This needs to be declared via Self Assessment and paid by 31 January following the tax year of disposal.

The settlement agreement should ideally address who bears the CGT liability. Some settlements pass this cost to the spouse receiving the asset, whilst others split it. Whatever you agree, make sure it’s explicitly stated in writing and that both parties understand the tax implications.

Claiming Spousal Exemptions on Time

Don’t forget that gifts between spouses are exempt from Inheritance Tax (IHT). If one party gifts their share of the home to the other (rather than selling), there’s no IHT liability. However, this exemption applies only to married couples and civil partners, not post-divorce. Once again, timing is everything.

Additionally, ensure you notify HMRC and update the Land Registry promptly once any transfer is complete. Delays can create complications if circumstances change or if HMRC queries the transaction later.

Final Thoughts

The intersection of divorce law and tax law can be genuinely confusing, and mistakes are costly. The key takeaway is that timing matters—whether it’s the timing of a sale, a transfer between spouses, or the decree absolute itself.

For tailored advice, contact Severn Accounting—we’re here to help.