I had to abandon my family home with my children and now face a massive CGT bill

By HEATHER ROGERS FOR THIS IS MONEY

Updated:

I bought the marital home with my husband in 2000. During this time a vast amount of refurb and an extension were undertaken between 2000 and 2011.

Unfortunately in 2011 I made the difficult decision to move out of the family home due to an increasingly difficult and strained relationship that was not conducive to a healthy environment for my two young children, and my ex-husband declined to move out of the family home himself.

I moved locally and proceeded to rent a flat for 11 years, putting a roof over all our heads. I worked all hours to ensure I could provide a stable and peaceful home for my children.

My ex-husband continued to live in the family home, and I was misinformed about moving out and any potential capital gains tax risk.

The enormity of the emotional stress and instability of the situation made selling the property immediately after moving out unfeasible and the complexities and timing of my departure meant that I was unable to manage the sale until much later - 2022. And the house took over a year to sell.

The total cost of my renting during this period amounted to £108,900, which I funded entirely myself.

CGT bill: I am seriously concerned I could potentially lose my home in order to settle even part of the amount levied

CGT bill: I am seriously concerned I could potentially lose my home in order to settle even part of the amount levied

The house sold in 2022 and from the profit debts and a large mortgage were deducted.

HMRC calculations may deem the profit to me to be £260,000 approximately. 

Based on this I am struggling to understand why just last week, I am being asked to pay £70,000 as CGT. I did not walk away with £260,000 - it was a lot less.

I am a senior project manager in the NHS cancer hospital where I have worked for 30 years (and still do) and have dedicated my career to serving the community.

Moreover, I am now also the sole caregiver for my 91-year-old mother, who is registered partially sighted, with mobility issues due to chronic arthritis.

This places considerable responsibility on my shoulders currently, along with an unexpected and untenable tax burden that I am struggling to understand as to how this could even be fair.

I am seriously concerned that I could potentially lose my home in order to settle even part of the amount levied. 

At the time of the sale, I did not own any other property. Do you think I have grounds for appeal please?

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Heather Rogers replies: I am sorry to hear you have had a stressful time and are still in a difficult situation now.

Divorce, capital gains tax and private residence relief can be complex, and in many cases unfair on the departing spouse.

New rules came in on 6 April 2023 which make matters fairer and less pressured. I will explain the general position and cover the old rules and the new ones, before looking at how this affects you below.

What is 'private residence relief' and when is it available?

When we sell our own home, normally no capital gains tax is payable as the disposal is normally covered by private residence relief.

The PRR only applies to your main home, which you own and live in. If you own a property and no longer live in it, you can’t claim PRR for the period that it is no longer your main home, even if you have moved out to rented accommodation. 

There are some exceptions where full PRR may not apply:

- You have claimed PRR for another property as you no longer live in the property you have just sold

- You have rented the property out full or in part (excluding lodgers)

- You have used the property in whole or part for business

- You bought it with a view to making a gain

- The land including the building is greater than approximately one acre (5,000 square metres).

Private residence relief can be claimed only on one property at time: the main residence.

If you have more than one home, then you need to make a formal election to HMRC as to which of the properties is regarded as the main residence.

You can check your eligibility for PRR here.

If full PRR is not available, then you may have to pay CGT. 

The CGT rates on residential property can be found here, and see the box on the right.

How does CGT work? 

Capital gains tax is payable on the profits from the sale of an asset - what you sell it for, less what you paid for it.

Depending on the asset there may be certain reliefs available and each person has a capital gains tax allowance to offset against their gains.

This reduced to £3,000 in April, after being cut to £6,000 in April 2023. Before that, it was £12,300.

If an asset was transferred to you as a gift, then the value at transfer will be the valuation for acquisition.

When the asset is left to you through a will, then the probate value will be the value you are deemed to have acquired it for.

You can deduct costs of acquisition and disposal if relevant - the estate agent's and solicitor's fees on sale, for example.

You can also deduct costs where you have spent money and have added value to the asset.

What happens when a couple divorce and the house is sold or transferred?

I will detail the old and new rules below. The new rules apply to asset transfers taking place on or after 6 April 2023, and prior to that date the old rules apply.

The pre 6 April 2023 rules

The home is often the most valuable asset the couple own and therefore either it, or the proceeds of its sale, will form the largest part of the settlement when they divorce.

If the home is being sold, the proceeds will often be divided equally between the parties as part of their financial settlement agreement.

Here are the pre-April 2023 rules regarding PRR under various living arrangements.

- If both parties have remained living at the property until it is sold, both can claim full PRR on their share.

- The party that has remained in the property until the date of sale can claim full PRR.

- If the sale of the property took place within nine months of the departing spouse moving out of the family home, then the departing spouse’s gains would be exempt from CGT.

If full PRR couldn’t be claimed, then CGT would be due on the part of the gain which is not covered by PRR.

The annual capital gains tax allowance, if not used elsewhere, could be used to offset the amount due.

Additionally, under the pre April 2023 rules, a special extension to PRR could apply where one spouse moved out of the marital home and transferred their interest in that home to the other spouse (who continued to occupy the property).

The conditions that needed to apply were as follows:

- The home was transferred under a court order or other agreement.

- No other property became a main residence of the departing spouse or civil partner

- The marital home transferred remains the main residence of the remaining spouse or civil partner.

In such cases, under the pre-April 2023 rules, the leaving spouse or civil partner would still obtain private residence relief from CGT for the period from them moving out to the point of transfer to the other party.

Other asset transfers between spouses are exempt from CGT and for asset transfers prior to 6 April 2023, this relief continued to be available but only up to the end of the tax year in which the couple separated.

After that, asset transfers between the couple were at market value, as opposed to the 'no gain no loss' principle.

The only exception to this was where the house was transferred to the spouse, as detailed above.

The post 6 April 2023 rules

For transfers of assets taking place on or after 6 April 2023, including the family home, the rules are much more generous.

Married couples or civil partners who are separating continue to have ‘no gain no loss’ CGT treatment applied on transfers of assets to each other for up to three years from the end of the tax year of separation.

However, if the couple divorces (or become legally separated by court order) before the end of the three-year period, ‘no gain no loss’ treatment will end at the date the divorce is finalised, unless the transfer of assets takes place as part of a formal divorce (or court separation) agreement.

Where assets are transferred as part of a formal divorce (or court separation) agreement, there is no time limit applied to ‘no gain no loss’ treatment of asset transfers, meaning for those assets no CGT will be payable even if they are made outside the three-year period.

You are considered as separated from your spouse or civil partner for CGT purposes if you are separated:

- 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 civil partnership then you cannot transfer assets between you under the 'no gain, no loss' rules.

These new rules mean that where the matrimonial home is sold after 6 April 2023, a spouse’s share of the proceeds will remain free of CGT provided the home has been their main home throughout the entire period of ownership.

However, if you move out of the property before its sale then you may need to think about your CGT position.

If the property is sold within nine months of you moving out, then PRR should be available to cover any gain. If you move out more than nine months before its sale, then a proportion of the gain may become liable to CGT.

However, you can choose to treat the period after you ceased to reside in the home as if it had been you only or main residence where:

- The sale is made under a formal divorce or separation agreement or court order

- Between you ceasing to live in the home and the sale to someone other than your former spouse or civil partner, the property continues to be the only or main residence of your former spouse or civil partner

- You have not nominated any other property to be treated as your only or main residence for the period between you moving out and the disposal of your former matrimonial home

- However, if you do claim PRR for the period between moving out and the sale to a third party, you will not be entitled to PRR on any other home for that period.

Tax tips from Heather Rogers

What does this mean for you?

As your house sale took place in 2022 and therefore under the old rules, you have a potential CGT liability as explained above.

However, if you co-owned the house for 22 years then 11 of them (the years you lived there) plus the allowable last nine months of ownership would be eligible for PRR.

Just under 50 per cent of the gain for your share (your share of proceeds, less your share of costs, including improvements, less any available CGT allowance for the tax year in question), would be subject to CGT.

If the house sale had taken place after 6 April 2023 then it would have fallen under the new rules, which would have been more beneficial for you in the circumstances and could have avoided any CGT liability.

Regarding what you do now, I very strongly advise you to find a reputable accountant who can check your capital gains tax calculation is correct and ensure you don't pay any more than necessary. Read my guide to finding a good accountant here.

If a taxpayer cannot make a payment, they can contact HMRC's Payment Support Service to try to agree a time to pay (TTP) arrangement.

HMRC may allow you to settle the liability in instalments, usually over a few months. It doesn’t give a CGT option (as normally the money is there to pay it), but the option to pay in instalments may well be accepted given your circumstances, although you would pay interest. Your accountant will be able to advise on this.

I don’t know your particular circumstances concerning your separation and divorce, any court orders that might be in place, or the asset split between you and your ex-husband - or even if you ever made a formal financial settlement with him. 

It might therefore be worth consulting a solicitor as well. If you used one in your divorce, you could go back to them or find a new firm to give you advice.

The Law Society has an online tool you can use to find solicitors in your area with the relevant expertise.

For anyone else who is reading this and has moved out of the marital home due to separation or divorce, it is best to get professional advice to help you minimise (or hopefully avoid) any future tax bill, because this is such a tricky area to handle on your own.

Ask Heather Rogers a tax question

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, inheritance tax, income tax, capital gains tax, and much more.

If you would like to ask Heather a question about tax, email her at [email protected].

Tax expert Heather Rogers answers our readers' questions

Tax expert Heather Rogers answers our readers' questions

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