Navigating PRR and Property Transfers in Divorce and Separation

Divorce or separation often involves decisions regarding the family home. Understanding the implications of these decisions on capital gains tax, particularly in light of recent legislative changes, is crucial for both parties.

Sale of the Former Marital Home to a Third Party

When one spouse leaves the family home, and it remains the only or main residence of the other, new rules, effective from 6 April 2023, have significant implications. If the departing spouse later disposes of their interest in the property (to someone other than their former spouse or civil partner), certain conditions allow the property to be treated as their main residence until the disposal date. These conditions include:

The disposal must be part of a divorce or separation agreement, or a court order related to the divorce, annulment, judicial separation, or a permanent separation.

The property must continue to be the main residence of the remaining spouse or civil partner.

The departing spouse must not have elected another property as their main residence during this period.

These provisions are especially beneficial in situations where the sale of the home is delayed, say until a child reaches adulthood. The departing spouse can continue to claim Private Residence Relief (PRR) on their share of the gain, provided they haven’t designated another property as their main residence.

Transfer of Interest in Connection with a Court Order

The no gain/no loss rules have been extended to transfers of interest in the marital home under a divorce settlement. This applies regardless of the time elapsed since separation, provided the transfer is made as part of a divorce or separation agreement or court order. This amendment removes the time pressure for transferring property interests between divorcing or separating partners.

When one partner retains the home, this change prevents capital gains tax from arising on the transfer of property interest from the departing to the remaining partner. It ensures that when the property is eventually sold, the residing partner can benefit from PRR, assuming it was their only or main residence throughout their period of ownership.

Implications for Divorcing or Separating Couples

These legislative changes offer considerable relief and flexibility for divorcing or separating couples dealing with property transfers. They ensure that capital gains tax does not add an additional burden during what is often a difficult time. For the departing spouse, the ability to continue benefiting from PRR without time constraints offers significant financial relief. For the remaining spouse, the no gain/no loss rules on transfers provide peace of mind and financial stability.

Conclusion

The recent legislative amendments provide valuable tax relief options for those going through divorce or separation. Understanding these options and their implications on property transfers is key to making informed decisions. It’s advisable for individuals in such situations to seek professional advice to navigate these complexities effectively.

 
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