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With all the things to consider when going through a divorce, one of easiest to forget is the tax involved when selling your house. Though related taxes come in various shapes and sizes, they are fortunately easy to understand and deal with.
Capital Gains Tax (CGT)
Capital Gains Tax is a tax on the profit you and your ex make when you sell your house. Both you and your ex will be treated and taxed as separate individuals and the tax that you will pay will be based only on your gains (and not your exes or joint gains). The house is treated as a disposal asset, which also includes gifts or other assets given in the settlement. Fortunately, each individual has a tax exemption of £11,100 for the 2016/2017 tax year, so you may not need to pay this tax. However, if your profit or gains are over £11,100, you will need to pay CGT. This costs 18% of gains for basic rate taxpayers and 28% for higher rate taxpayers. If you incur any losses during the tax year, this can cover some of the CGT you would have otherwise have had to pay in full. Determining your profits and losses can be difficult, so contacting an accountant, tax adviser or even HM Revenue and Customs could be beneficial. Information you will need to give them include the date of the decree absolute (the legal document that officially ends your marriage), any court order and any contracts stating the transfer of the house and other assets.
If you are transferring or selling your house to your ex, the house is treated as not giving rise to a profit or a loss and thus you will not need to pay CGT- so long as the sale or transfer takes place within 18 months of you leaving the house. If the sale takes place after 18 months, then a percentage of your profit will be taken as CGT.
There are some cases where private residence relief is given- in others words- whereby you are reimbursed for the CGT. If you meet the following criteria, then this is likely to happen: the home you are selling has been your main home of residence; you haven’t been letting part of the home out; you haven’t used any of the house for business; the grounds are less than an acre; you didn’t buy the house to make a gain. If you don’t meet all these criteria, then it is likely you will need to pay CGT. You can use this tool to determine your potential tax relief: https://www.gov.uk/tax-relief-selling-home
If you are transferring or selling the house to your ex, then you are exempt from inheritance tax. In cases where you are selling or transferring between UK and non-UK natives however, the exemption is limited to assets totalling £325,000.
Something to bear in mind…
The tax year is from April 6th to April 5th the next year, and thus where possible- it is advised to officially split on the 6th April (or as soon after that date as possible). This gives you a full year to sort out your assets, instead of say, a couple of months. Remember that exemptions from related divorce taxes only occur within the tax year of divorce and thus, for example, if you got divorced in February you would only have 1-2 months to organise all the home arrangements (e.g. solicitor meetings and going to court where necessary). This is usually not enough time and thorough planning for optimal tax savings should be considered.
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