Breaking up is hard to do but you can protect property from taxman

Published on Friday 26 September 2008 19:26

THESE difficult financial times are enough to test the strength of any relationship. Sadly, the growing number of divorce cases is proof that the old expression "when poverty comes through the front door, love flies out the window" is true enough.

Divorce is an expensive business, because of legal fees and the taxman. He is always there, wandering the marital battlefield, bayoneting the wounded and taking some of the spoils.

For most married couples, the matrimonial home is the most valuable asset, but unless certain steps are taken, the unwitting can find that the taxman also benefits from the family home.

One crucial aspect is capital gains tax (CGT) and how to split the sale proceeds two ways, not three. If the matrimonial home is sold as part of a divorce settlement, then a part of the profit could become liable to CGT.

The biggest difficulty arises where the property is to be the home of one spouse for a substantial period while the other retains a share in the eventual sale proceeds.

One way of tackling the problem might be for the spouse moving out to settle in trust their half share of the house on the other spouse for a specified period. If this is done, there should be no CGT to pay on sale by either party because of a rule which in certain circumstances extends the CGT exemption on private residencies to trusts.

The exemption applies where the property held in trust is occupied by someone as a private residence. Consequently, the profit on sale is made by the trustees, who can claim the exemption and distribute the cash, tax free, to the spouse who set up the trust in the first place. The rules are relatively simple: if you transfer your share of the home to your estranged spouse and have not acquired a new home of your own, you should simply claim the special concession and no CGT will be payable on sale.

If you transfer your share in the home to your spouse and have acquired a new home as your main residence, you should effect the transfer within three years of separation date.

Failing that, put your share of the house into trust for your wife with the remainder to yourself until the divorce settlement, when you can then transfer your interest in the trust to your former spouse free of tax.

If you don't want to transfer your share to your former spouse and would like to share in the eventual sale proceeds, transfer your share of the house into trust for your spouse with the remainder to yourself. On sale, the trustees will receive your share of the proceeds tax free and will distribute these to you, also tax free.

&#149 Ronnie Ludwig is a partner in the Saffery Champness private wealth group