elderly man sitting alone

Can Estranged Couples Avoid the Second Home Stamp Duty?

Three Percent Surcharge Leads Couples to the Divorce Courts

George Osbourne’s surcharge on second homes has hit an unintended target, meaning that estranged couples face significant costs unless they divorce.

When George Osborne announced the three percent surcharge on second homes, many people were up in arms. The move was seen as a direct attack on those investors who were in a position to take advantage of the few rays of light in an otherwise dark economy, the buy to let market.

However, an additional demographic has been caught up in the crossfire, and it is causing couples who are otherwise “happily estranged” to have to consider divorce for purely financial reasons, and most look to a divorce lawyer to help navigate the legal minefield.

Main home or second home

The problem emerges when a couple separates and the party leaving the matrimonial home decides to buy his or her own property. In most cases, that party still has a vested interest in the original home, and the new buy is therefore considered a second home, and is subject to the surcharge.

The problem has received plenty of attention from the media due to several high profile cases in which the couple in question are well into their 80s, and needing to make changes due to end of life care issues. Often, they have been separated for decades, and yet at this point in life, they feel compelled to divorce.

Why? Because in these cases, ownership of the family home is still 50/50 and therefore each party’s ownership is most likely to be considered by HMRC to be a “major interest.”

The caveat “most likely” is an interesting one. Sean Randall, KPMG’s head of stamp taxes, said that there is no hard and fast rule about whether a 50 percent share actually constitutes a major interest or not, but HMRC work on the assumption that it does. According to Mr Randall, it would take a brave person to challenge this position, and nobody has done so yet.

And so we have the position where long separated octogenarians are, by default, subject to the surcharge if they decide to buy a small property instead of renting – even if they have not lived in the former matrimonial home for years.

Is divorce the only solution?

For most people who find themselves in this situation, divorce is probably the most straightforward solution. And for many it is no big problem. If the couple has been estranged for years, bitterness and recrimination has usually passed, financial arrangements are already agreed, and the divorce is a formality that takes minimal time or expenditure.

For others, however, it might not be so simple. Perhaps the party who moved out is the owner (or part owner) of the house but is happy for the estranged spouse to remain living there. In this case, he (or she) still owns it, and divorced or not, a second property purchase will incur the surcharge.

In this case, the only solution is to gift his half of the property to either the ex spouse or to any children. Of course, this then raises potential issues with inheritance tax if he, or she, should die within seven years of the transaction, but can otherwise be a neat solution to a difficult problem.

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