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I have recently been through a divorce, and our matrimonial home is almost at the completion stage of sale.

I have been keeping up my half of the mortgage payments, although my ex has stopped paying her share.

Because of the situation and atmosphere I moved into a friend’s spare room just over a year ago, and I pay him for this usage. But I do go back at least once a month, because I still have some stuff there.

We bought the house approximately 18 years ago for £225,000, there is an outstanding mortgage of approximately £125,000, and we sold at £425,000. The equity will be shared equally.

I am a pensioner. Do I need to pay capital gains tax?

Heather Rogers replies: I will explain how capital gains tax works when it comes to property, then what happens in a divorce where one partner departs the family home to live elsewhere.

There are some important new rules regarding CGT and divorce starting in April, which I will also run through below.

How is capital gains tax applied to property?

When we sell our own home which we live in ourselves, normally no CGT is payable as the disposal is covered by ‘private residence relief’.

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

If you have more than one home, then you need to tell the taxman which of the properties is regarded as the main residence. This is more technically referred to as making a formal election to HMRC. 

You can check your eligibility for PRR here.

However, some exceptions where full PRR may not apply are as follows:

  • You elected to claim PRR for another property as you no longer live in the one you have just sold
  • You rented the property out in full or in part (not including having lodgers)
  • You 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).

If full PRR is not available, then you may have to pay CGT. See the box on the right for the rates.

What are the PRR rules if you get divorced?

Divorce can affect the availability of PRR and give rise to some unexpected tax liabilities. I will explain what happens in the two main scenarios, the first of which appears to apply to you based on what you told me. 

A couple divorce and the house is sold

The home is usually the largest 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.

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

If only one stayed, the party that remained in the property until the date of sale can claim full PRR.

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

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

The annual capital gains exempt amount is available to use against this gain – currently £12,300, but this will drop to £6,000 from 6 April 2023 and £3,000 from 6 April 2024 – providing it has not been used against any other gains.

Any unused capital losses brought forward from previous tax years can also be offset. 

One partner transfers their share in a property to an ex-spouse in the financial settlement

A special extension to PRR may apply where one spouse moves out of the marital home and transfers their interest in that home to the other spouse who continues to occupy the property.

It applies under these circumstances:

  • There is a court order or other agreement
  • No other property becomes a main residence of the leaving spouse or civil partner
  • The property in question remains the main residence of the remaining spouse or civil partner.

If these conditions are met, the leaving spouse or civil partner will still obtain private residence relief from CGT for the period from them moving out to the point of transfer to the other party.

What about CGT on other assets in a divorce?

Asset transfers between spouses are exempt from CGT and this relief continues to be available up to the end of the tax year in which the couple separate.

After that, asset transfers between the couple are at market value, as opposed to the ‘no gain no loss’ principle.

You are regarded as separated from your spouse or civil partner for CGT purposes if this occurs:

  • By a court order of 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.

What are the new CGT rules on asset transfers between divorcing couples?

These are due to come in on 6 April 2023. Separating or divorcing couples will be given up to three years, starting from the year in which they separate, to make ‘no gain or no loss’ transfers of assets between one another, meaning no CGT would be payable.

There are also changes extending the PRR for a departing spouse, which will be welcomed.

You say you are divorced, but it is not clear what stage you are at in terms of your financial settlement, so it will be worth checking with your lawyer whether you can gain any advantage from these new rules.

Will CGT be due in this case?

Based on the information you supplied, you and your ex-spouse owned the house jointly, the proceeds of sale are being split, and you have been living elsewhere for over one year.

As the maximum time you are allowed to extend the PRR in these circumstances is nine months, a small taxable gain may arise on the disposal of your share in the property as not all of your gain will be covered by PRR.

If the gain is not covered by your allowance, or if you have used the allowance against other capital disposals in 2022/23, and you have no losses to offset, then you may have to pay CGT.

But do check with your lawyer regarding the imminent CGT rule changes on divorce in case you could benefit.

You will need to make a declaration to HMRC if not all your gain is covered by PRR.