Selling a house is difficult.
Selling a house during or after a divorce is even more difficult.
Capital Gains Tax plays a role in this.
So, understanding it is crucial for all parties involved.
What is Capital Gains Tax?
In the UK, Capital Gains Tax is a tax charged on any profits made on the sale of a major asset.
There is currently (between April 6th 2024 and April 5th 2025) an annual exempt amount that permits you to avoid paying tax on capital gains up to a certain amount. This stands at:
- £3,000 for individuals, personal representatives and trustees for disabled people
- £1,500 for others
Anything over this exempt amount is then taxable. The rates for these are currently:
- 10% (18% for residential property) for your entire capital gain if your overall annual income is below £50,270
- 20% (24% for residential property) for your entire capital gain if your overall annual income is above the £50,270 threshold
You pay this amount on most personal possessions valued at over £6,000, although this does not include your car.
Shares in a company and business assets are also included.
(Speak to a tax advisor for more guidance on your situation.)
You do not usually have to pay Capital Gains Tax when selling your main residence. Only when you are selling an additional property.
Why people sell a house during a divorce
Couples get divorced for many different reasons. And there are also different categories of divorce.
Similarly, there are several reasons for selling a house during (or immediately after) divorce, including:
- Couples cannot change the locks on a property without the other party’s consent, but living together can become very challenging. This makes them not want to see one another afterwards
- If neither party can afford to buy the other out of the mortgage, then selling a house might be a financial necessity
- It may also be necessary to pay off any debts incurred during the divorce, such as legal fees
- A court might create a ‘Financial Remedy Order’. It forces a property to be sold to support one of the parties themselves financially. (This might occur, for example, if one of the two people does not have a job)
- Sometimes, a house sale is deferred by a court order – to protect children living in the property, for example
‘No gain, no loss’ for divorcing couples
When spouses or civil partners separate, the UK government gives them up to three years to sell the house and any other properties they own.
This is calculated from when they stop living together. It enables them to register a ‘no gain, no loss‘ sale.
This rule was introduced on April 6th 2023 and is still in place today. It enables a divorcing couple to transfer property without Capital Gains Tax implications for up to three years.
But the couple no longer qualifies if they complete their divorce before the end of the three years.
Do both divorcing partners pay Capital Gains Tax?
Several factors impact who pays Capital Gains Tax during a divorce.
If you qualify for a ‘no gain, no loss’ rule, neither partner will pay Capital Gains Tax on the sale.
However, if the couple does not qualify for this, then the situation changes.
If both names are on the mortgage, both gain from the sale. So, they must pay Capital Gains Tax.
If only one name is on the mortgage, then only that person will be responsible.
Do I need to pay Capital Gains on a house I sold during a divorce?
Whether or not you need to pay Capital Gains Tax on a house sold during a divorce largely depends on several factors.
These generally include your financial circumstances and any applicable reliefs.
The ‘no gain, no loss’ rule typically applies if you transfer the house to your ex-spouse as part of the divorce settlement. This means there’s no immediate Capital Gains Tax to pay.
You might also qualify for Private Residence Relief, which can eliminate any tax due when the main family home is eventually sold.
Some exceptions are involved, such as:
- If you ever rented out the property in whole or in part
- How much land there is
- If the property ever involved business use
The timeframe also makes a difference. Current rules allow for a three-tax-year grace period.
However, you may be liable for Capital Gains Tax once this timeframe has passed, especially if you own more than one house.
A court order can also heavily impact how assets are treated in divorce.
Who gets the money from a house during a divorce?
There’s no straightforward answer to this question. Many different factors influence divorces.
For example, whether the property was owned in a joint tenancy or a tenancy in common.
A house sale’s proceeds for a divorcing couple are typically split equally.
However, if the divorce is acrimonious, a court order may determine the split of the proceeds for the couple.
Any mortgages, selling costs, and joint debts are usually settled before dividing the proceeds.
If children are involved, their needs and concerns can influence how the proceeds are split.
A prenuptial agreement isn’t legally binding, but it can be used to divide assets during divorce proceedings.
Given the complexities involved, consulting with legal and financial advisors is crucial. This will help you to understand the applicable laws and navigate asset division fairly and lawfully during a divorce.
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