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If we can’t afford to sell our family home, do we need to sort out finances on separation?

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By Demelza Patricio

Unfortunately, given house prices and stricter mortgage requirements, many couples find that when they separate, they have to leave their family home in their joint names, with the person that has moved out of the property having to rent a separate property.

They may then look at selling their home when the children finish education or at a point in the future when the person remaining in the house is able to buy out the other person’s interest. If you are looking at that kind of arrangement, is there any need to sort out your finances on divorce? The answer is a resounding yes!

If you are dealing with finances within Divorce Proceedings, you will enter into a Consent Order confirming how finances are to be dealt with. That can include an Order that, while the family home might stay in joint names, the couple would enter into a Declaration of Trust recording the specific interest that the person not living in the property has in it and the obligations of the person remaining in occupation.

If the Declaration of Trust records show that one of you will have a larger share of the property as part of your settlement, then there may be Capital Gains Tax (CGT) implications for the person who has the smaller share. For the purposes of CGT, they will be considered to have disposed of part of their share of the property.

There is no CGT payable on transfers of assets/properties between spouses, provided you are living together. This applies until the end of the tax year in which you cease to live together. It is, therefore, important to ensure that any transfer of a property, or preparation of a Declaration of Trust relating to a property remaining in joint names, happens before the end of the tax year in which you have separated.

What about selling a house some time after separating?

This family home will no longer be the principal private residence (PPR) of the person who moves out. If the house is sold within eighteeen months (for disposals before 5 April 2020) of the spouse vacating the property, PPR relief will continue to be available to cover the period between moving out and the date of disposal as the “last eighteeen months” rule will apply. From 6 April 2020, however, this period is being reduced to nine months (see Caroline Foulger’s Tax article later in this newsletter). However, if more than eighteen (soon to be nine) months elapse between one spouse moving out and the subsequent sale or transfer of the property, a period of absence will be created and a capital gain could arise.

New rules coming in from 6 April 2020 mean that if you transfer all or part of an interest in a residential property to your spouse or civil partner, your spouse will inherit your previous history of use of that property. HMRC has indicated they believe this will result in fairer outcomes. This is most relevant if the property has not always been your principal private residence during your period of ownership, perhaps if it has been rented out at times.

It is, therefore, worth taking advice from both a solicitor and an accountant about the best way to structure a settlement, to make sure you are aware of both immediate and longer term tax implications, so that you can make an informed decision.

Other reasons for having a Consent Order within divorce proceedings

You and your husband, wife or civil partner will have financial claims on each other as a result of your marriage/civil partnership. A Consent Order ends those claims, so that if one of you inherits assets, or wins the lottery, those assets are not vulnerable to being shared with someone you may have split up from many years beforehand.

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