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Tax and the Matrimonial Home - A Case Study

December 2016

Comment from a contact

Paul Short, Lambert Chapman LLP

 

Background

Janet and John, both highly paid professionals from wealthy backgrounds, marry in November 2008. They purchase a property worth £500,000 to be their matrimonial home, which was a bargain as it would have been £600,000 the year before. They both own their own properties in the “Essex stock broker belt” and decide to let these properties out to secure rental income and higher rate relief on the mortgage interest.

After several years of marriage, Janet and John’s relationship breaks down in early 2013, with the couple separating in March of the same year. John vacates the matrimonial home and moves back to live in his former home, which has just become vacant, following the end of a short term let. He immediately elects for his former home to become his principle private residence.

Due to their busy lives, there is a delay before divorce proceedings are instigated. In March 2016 Janet instructs a matrimonial solicitor to deal with the divorce. By this time, Janet has moved from the former matrimonial home to a new residence with her new partner.

Janet and John decide to sell the former matrimonial home, and as both have mortgages and other commitments are keen to pay as little tax as possible. Even though their relationship is amicable the former matrimonial home is not sold until November 2016 for £2 million. The property had enjoyed an average growth of 20% per annum until 2015, where the price has remained mainly static and may have slightly fallen.

Ignoring costs, the gain Janet and John have made disposing of in the property is £1.5 million. Even though John left the property in 2013 he will still be covered under the PPR for the last 18months of ownership. Janet is also covered by the 18 month rule.

How much tax should they pay?

John owned the property for 8 years. It was his principle private residence for approximately 4.5 years. John will also receive an additional 1.5 years protection. Therefore his exposure is approximately 2 years.

Bearing the above in mind the chargeable gain is therefore:

Gain (John’s half share)  750,000
Less PPR exemption (750,000 x 6/8) 560,000
  190,000

Therefore ignoring the annual exemption the capital gains tax is £53,000.

Why were Janet and John vulnerable?

John could not elect for the former matrimonial home to be regarded as his principal private residence as he had already nominated his former property to be.

In all or most of the circumstances above, capital gains tax exposure arises.

How to prevent this?

Take advice from solicitors and financial advisers as early as possible.  

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, views or policy of Prettys Solicitors LLP.

Paul Short BA(Hons) FCA CF

Partner

Lambert Chapman LLP

T: 01376 326266

Paul.Short@lambert-chapman.co.uk

 

 

 

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