Separate lives but what about houses?
He lives in one property, she in the other – are split pair storing up trouble for the future?
QMy wife and I have two houses – no mortgage on either. We separated in June 2019 and my wife moved into our second property at the end of June 2019. I am concerned about what will happen if and when she wishes to sell it. Will it be classified as her main residence [for tax purposes]? We agreed that I shall live in the first house as my main residence, but can she do the same on the second house?
ADivision of assets in a separation can be complex, but it sounds as though you have landed on a solution that works for you both while you figure out your future.
When you talk about the tax situation when selling a second property, you’re talking about capital gains tax. Your main residence is protected by something called Private Residence Relief (PRR). This means you won’t pay capital gains tax on the profit you make from selling your main home for the time it was your main residence (plus the last 18 months of ownership).
This does not apply to second properties, where capital gains tax is charged on the profit you make when it is sold. You each have a capital gains tax allowance of £12,000 in the 2019/20 tax year, so if you jointly own the property, you will pay the tax on profits above £24,000.
The amount you pay will depend on your income tax band. If you’re a basic-rate taxpayer, earning less than £50,000 in this tax year, you’ll pay 18 per cent tax. If you’re a higher or additional rate taxpayer, earning more than £50,000, you’ll pay 28 per cent.
If the profit you make tips you into the higher tax band, you may pay the lower rate on some of the gain, and the higher rate on the rest.
There are ways to reduce your taxable gain by deducting the costs and expenses involved in selling a property, which include conveyancing fees and stamp duty, as well as any building work that pay have been carried out on the property.
If you have let the second property out in the past, you could also claim something called letting relief. This can only be used by property owners who have lived in a property at some point as their main residence, and then let it out – not to professional landlords who own properties to let out, but have never lived in them.
You can claim up to £40,000 in letting relief, covering the proportion of profit you’ve made while you were letting it out, meaning you don’t have to pay capital gains tax on that amount.
It’s worth noting now that there are some changes coming in April 2020 that will mean you get less tax relief when selling a property that is not your main home.
Private Residence Relief is being halved, from 18 months to nine months, while letting relief is being scaled back to those who were living in their property with a tenant – not those letting the property out in its entirety. So, unless you sell the second property before April 2020, you’re going to have a bigger capital gains tax bill to pay.
Why have I explained all of this? Well, unfortunately, the property that is now your wife’s will attract capital gains tax in the way I’ve just described. She will benefit from the Private Residence Relief from June 2019, when the house became her main home, but the period of ownership before that date will still be liable for capital gains tax in the future should the property be sold.
You may want to discuss how you might share that liability in the future, should she decide to sell the property. It may worth seeking legal and tax advice together.
BE IN THE KNOW
There are ways to reduce your taxable gain by deducting the costs and expenses involved in selling a property