Exploring the tax treatment of the main home upon divorce

Capital Gains Tax » February 11, 2020

tax divorce main home

The inevitable transfer of assets in a family breakdown makes capital gains tax (CGT) the headline tax for divorcing couples. Advisers need to be aware of the changes from April 2020 and the impact these will have on divorcing couples. In this article I will provide an overview of the tax implications of transferring one of the most common large assets in divorce and how upcoming changes to the tax law will impact this; the main home.

The main home

The government has made several changes to principal private residence (PPR) relief which will be effective from April 2020. It says the aim of the changes is to ensure that the main beneficiaries of the relief are genuine owner occupiers. The changes are expected to bring in an additional £50m in revenue in 2020/21 increasing to £150m by 2023/24. The three main changes for PPR relief coming in from April 2020 (for divorcing couples) are:

  1. the period of deemed occupation being reduced from 18 months to nine months (prospective amendment to s223, TCGA 1992);
  2. the loss of lettings relief (prospective repeal of s223(4), TCGA 1992 and replacement with prospective new s224A, TCGA 1992); and
  3. changes to the transfer of ownership provisions (prospective amendment to s222(7)(a), TCGA 1992).

Reduction in period of deemed occupation

This amendment reduces the length of the final period of ownership that is always eligible for relief from 18 months to nine months (while retaining the existing 36 months available to people with a disability or those in a care home).

This specifically affects couples who are divorcing as it is common for one party to move out of the marital home before the final divorce. By the end of the divorce one party will usually own and occupy the home requiring a transfer of 50% of the property to their spouse ahead of the final divorce.

If this takes place after the tax year of separation then the transfer take place at deemed market value so that individual who is ‘gifting’ their share of the property may be liable to CGT if they have been absent from the home for over nine months (currently 18 months).

Of course, if certain conditions are met, it may be possible for individual gifting their share to make a claim that the former marital home continues to be treated as their PPR (s225B, TCGA 1992). However, as one of the conditions is not giving notice for another home to be their PPR for any part of the period, the claim may not be advantageous.

It’s also important to consider if any other PPR relief conditions might be applicable in their case (s223(3), TCGA 1992). For example, did the non-occupying spouse move for work abroad? If they moved abroad for work and were prevented from re-occupying the property due to working abroad, then a period of absence of any time frame will be covered.

Did they move for work within the UK? If they moved within the UK for work and were prevented from re-occupying the property due to working within the UK, then a period of absence of up to four years will qualify.

Being able to flag this up early in negotiations can be critical as it enables the parties to consider this point and hopefully reflect it in the financial discussions. While it may not be possible to negate the charge, the solicitors may include an indemnity of the CGT in the financial order which will protect the client’s exposure.

Loss of lettings relief

From 6 April 2020 lettings relief will only be available if the property owner was living in the property while it was rented out.

It is clear that this relief withdrawal will impact owners who bought a property to live in and then bought a second larger property and rented the first property out.

In the author’s experience there are many couples to whom this applies. Again, it makes complete sense to quantify the exposure to CGT early on in the discussions so that the tax figure can be factored into the discussions. For example, a property worth £150,000 may have a potential CGT liability of £30,000 if sold or transferred in February 2020 but could have a CGT liability of £45,000 if sold in May 2020 due to the changes in lettings relief.

Changes to the transfer of ownership provisions

From 6 April 2020 when a spouse or civil partner (CP) transfers an interest in a property to their spouse or CP the receiving spouse or CP will inherit the transferring spouses’ ownership history, including previous use of the property regardless of whether the property is the main residence at the time of the transfer. Currently, the spouse or CP only inherits the ownership history if the property is the main residence at the time of the transfer.

For couples who have not bought their marital home together and where the property has not always been the main residence, this will add complexity to calculating the potential CGT charge as different rules apply to transfers depending on whether the transfer takes place before or on or after 6 April 2020.


Consider Jane and John. Jane bought her property in 2000 as a holiday home in Wales. She lived and worked in Birmingham. In 2005 John and Jane got married and both lived in Birmingham. In 2015 when the mortgage ended its fixed term Jane transferred 50% of the Welsh property to John. In 2016 they decide to move to the property in Wales. In 2020 Jane and John decide to sell the Welsh property. As the transfer took place before 6 April 2020 and before the property became the couple’s main residence, PPR relief will be available on John’s share of the gain for the period from 2016 until the disposal in 2020. Jane’s ownership history prior to the transfer in 2015 is ignored for the purposes of calculating PPR relief on John’s share.

Making an election

The prospective insertion of new s222(5A), TCGA 1992 may prove helpful for people with second homes. It applies where an individual has failed to make a nomination specifying which of two of more residences is their PPR within the normal statutory time limit of two years. It allows a late nomination, provided that the individual has not made a nomination previously and the interest held in one of the homes has a negligible market value (eg, a weekly rented flat).

Timing issues

One of the biggest changes to CGT is not a technical change but rather an administrative one. The payment window for CGT is moving from 31 January following the end of the tax year to 30 days from the date of completion of the disposal.

For some individuals who sell properties the 30-day payment window (while it may be tight from an administration perspective) is likely to be manageable fiscally – assuming there is enough equity in the property to meet the CGT liability.

However, for couples who are divorcing, the connected persons rule (s286(2), TCGA 1992) means individuals are treated as connected persons for the period from the end of the tax year of separation until the final divorce. As connected persons, any transfers between the parties take place at deemed market value (s18, TCGA 1992), resulting in individuals being assessed for CGT on a transfer which may result in no cash exchanging hands.

The 30-day payment window may create high stress situations for individuals who do not have the cash immediately to hand, either because they need to re-mortgage a property or because they have been required to pay cash over as part of the settlement.

The date of disposal can be difficult to determine where the disposal is made in accordance with a court order. The view of HMRC is set out in its Capital Gains Manual at CG22423. The normal timing of a disposal for CGT is the exchange of contracts, but for the purposes of the 30-day payment and reporting requirement, it is completion. However, it is assumed that the HMRC guidance for divorcing couples will also apply for this purpose.

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