Capital Gains Tax and the Family Home

Capital gains tax relief can be given on an individual’s Principal Private Residence i.e. their main residence which is often the family home. It can be an extremely valuable tax relief method for separating spouses because if all the conditions are met, all or part of the gain arising from disposing of the family home can be exempt from capital gains tax.

Principal Private Residence relief (PPR) is available if:

  • a dwelling house or part of a dwelling house has been a spouse’s only or main residence at some point during his ownership;
  • the dwelling house or part of it was not acquired for the purpose of realising a gain on the disposal

So what is a ‘dwelling house’? While the capital gains tax legislation does not define this term, it is defined as a house which is lived in, day and night or where it is slept in at night and occupied for the purposes of life during the day.

Spouses and civil partners who live together can only have one PPR between them. If a marriage breaks down and one spouse or civil partner leaves the family home, the departing partner can still be treated as occupying the family home for PPR purposes provided that:

  • the staying party continues to live at the family home
  • the departing party has not elected that some other dwelling house should be treated as his main residence
  • one party disposes of his interest in the family home to the other; and
  • the departing party makes a specific claim for PPR to apply to his interest in the family home

It is important to be aware that whilst any transfer of assets between married couples are deemed to be on a ‘no gain no loss’ basis for capital gains tax, when a couple is divorced, capital gains tax can apply to any transfer of assets between the former couple.

Capital gains tax is notoriously complicated and can make a considerable difference to any financial settlement and it is important that both tax and legal advice is taken together if capital gains tax becomes an issue.

Serving Bedford, Northampton and Milton Keynes, our lawyers can help you with your family law and divorce matters. Contact us today on 01234 889777 to speak to a solicitor about how we can assist you.

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