Bereavement, divorce and moving home are commonly cited as being some of the most stressful events in a person’s life.
One of the key stress-causing factors on divorce is the uncertainty, particularly around where someone will live post-separation. It is not uncommon for one party to want to stay firmly put in the family home.
This can be for any number of reasons – it offers stability for the children, provides financial security, and, for some, the home is intertwined with their identity. It can be, therefore, be a contentious battleground for divorcing spouses.
In the run up to this year’s Budget there has been much speculation about changes to property taxes.
That has created even more uncertainty for those who are going through divorce proceedings, as extra charges might need to be considered as part of the negotiations.
New rules: Adrian Clossick, partner at law firm Stewarts, says rumoured changes to property taxes in the Budget could be detrimental to those getting divorced
The need to pay more tax, either now or in the future, could upturn decisions about who stays in the family home – or even if they stay there at all.
‘Mansion tax’ and council tax band changes
Rumours swirl that there may be a ‘mansion tax’ introduced, levying a surcharge and increasing council tax on high value properties.
This could mean a council tax surcharge on homes which currently fall in council tax bands F, G and H, or a revaluation of properties in those bands.
National property tax
Other rumours have suggested that the Government may introduce a new specific tax charge on the sale of homes worth more than £500,000.
Capital gains tax
The final change being touted is the total or partial removal of capital gains tax exemption for gains on high-value family homes.
Currently any gain made on the sale of a family home is exempt from tax, no matter how large the gain is, as long as it is the family’s main residence and not a second home.
The Government may look to limit that tax-free element and charge CGT above a fixed threshold, with figures from £500,000 to £1.5m reportedly under consideration.
If the financially weaker spouse wants to stay in the home, they will need to be alive to the fact they may now need a lot more money to meet any excess tax
How does all this affect divorcing couples?
Firstly, it should be noted that the proposed changes may have a disproportionate effect on those in the south east of the country, and London where property prices are higher.
A significant proportion of the family wealth may be tied up in property.
Secondly, if the Government goes down the route of increasing council tax charges for high value property, that will have the effect of increasing outgoings and potentially decreasing disposable income.
Finally, if the Government decides to impose an additional tax charge upon the sale of the family home, whether by way of reducing CGT exemptions or a specific tax on expensive properties, any future tax charge upon the sale of the property would need to be considered as part of the divorce negotiations.
If the financially weaker spouse wants to stay in the home, they will need to be alive to the fact they may now need a lot more money to meet any excess tax. That may mean they need more maintenance to meet higher council tax charges or that they need more capital to pay tax if the house is subsequently sold.
The debate as to who keeps the property will need to factor in this affordability.
Tax reforms introduced in April 2023 offered divorcing couples greater flexibility to defer tax until sale rather than it being payable immediately upon divorce.
However, even with those reforms, divorcing couples will need to factor in any future tax into their divorce settlements. If they don’t, they run the risk of being left with a nasty surprise if they sell their house further down the line.
It is therefore hoped that tomorrow’s Budget brings some much-needed certainty for divorcing couples grappling with a fundamental decision for them and their children: can we afford to remain in our family home? Without that certainty, already fraught divorce negotiations may become even harder.
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