CGT after divorce

[Mha]

I would appreciate advice re CGT implications for my daughter who is going through divorce.
She and her husband bought a flat in London in 2012 for 495K. This property is now 950K. Since purchase they have never lived in the flat and is always rented.
She has been granted decree nisi. Husband has agreed to transfer his share of property to two children, which will go in trust with my daughter. Husband has left the daughters rented house in September 2016. Consent order and decree absolute is likely to be in next financial tax year i.e after April 2017.
I,d be grateful if someone give us advice re CGT implications.
Many thanks

[maths]

As non-one has lived in the property then any gain will fall subject to CGT.

If husband transfers his interest to the children (even if then held on trust as children under age 18) a CGT charge (18% and/or 28%) will arise on any gain made (approx 475k less 247k ie 228K assuming you each owned 50%). The liability arises in the tax year of "exchange".

If you/he wait until the issue of the Court Order or the Decree Absolute before transferring his interest the CGT liability arises in the tax year of the date of Court Order (if this follows the date of Decree Absolute) or tax year of Decree Absolute if Court Order precedes Decree Absolute.

IHT also needs to be considered given the numbers involved. A transfer by husband value 475k potentially precipitates an IHT charge; if a PET and he survives 7 years afterwards then no IHT charge would arise. If he dies within 7 years (maximum IHT charge 40% of [475k - 325k] ie 60k) which would be a liability of the children (not husband). Having said this, there ae arguments that no IHT charge should arise even if death within 7 years. Otherwise, insurance might be the answer here (particularly if husband young and healthy).

Any rental income of will be subject to income tax on husband's part not the childrens' (assuming bare trust).

Often property being transferred is the family home (not the case here) in which case dates of transfers become very critical.

If it's a friendly parting of the ways (hopefully) then makes sense to join forces to mitigate tax for everybody rather than fighting each other.

[Mha]

Thank you for your reply, very useful information. Please allow me to ask few questions.
Would you kindly expand how you reached your calculation "approx 475k less 247k ie 228K "
Apart from annual allowable CGT amount do we also deduct any associated expenses such as fees for purchasing/selling/renting, improvements and maintenance of the property. Also can we deduct expenses associated with the transfer of property ?
What is PET when you mentioned IHT charge?
Rental income after transfer will go to my daughter, therefore she will be subject to income tax on that rather than ex husband (as mentioned by you)
Fortunately this is a friendly parting and any advice to mitigate tax will be very valuable.
Many thanks.

[maths]

Would you kindly expand how you reached your calculation "approx 475k less 247k ie 228K "

Assumed husband owns 50%; hence his cost is 50% of initial cost and sale proceeds are 50%.

Apart from annual allowable CGT amount do we also deduct any associated expenses such as fees for purchasing/selling/renting, improvements and maintenance of the property. Also can we deduct expenses associated with the transfer of property ?

Yes certain costs are also deductible; my calculation was to give you an idea of the size of gain and associated CGT charge. Maintenance costs, however, not deductible re CGT (they are a deduction against annual rental income).

What is PET when you mentioned IHT charge?

A PET is a potentially exempt transfer. When one individual gifts to another and dies within 7 years there may be an inheritance tax charge.

Rental income after transfer will go to my daughter, therefore she will be subject to income tax on that rather than ex husband (as mentioned by you)

Whilst the rental income will as you say belong to your daughter, post the transfer, for income tax purposes it will be treated as that of father.

[Mha]

Hi
Thank you for your prompt reply.
Again very helpful. Strange rule about rental income taxed under husband when he does not own the flat!!
Thanks

[maths]

Agreed; it is strange.

The idea behind it is that the Revenue don't like a parent who really owns the property putting it in the child's name to reduce any income tax and CGT charges but really keeps the income/gains. It's not the only strange rule!!

[Mha]

Hi
This raises a question in my mind. Consent order include clean break. With this arrangement can husband has any claim on the rental income from the property.
Many thanks

[Mha]

Just read on gov.uk website re tax on rental income

Income Tax on income from the trust is paid by the trustees, but the ‘settlor’ is responsible for it. This means:

-The trustees pay Income Tax on the trust income by filling out a Trust and Estate Tax Return.
-They give the settlor a statement of all the income and the rates of tax charged on it.
-The settlor tells HM Revenue and Customs (HMRC) about the tax the trustees have paid on their behalf when filling out their Self Assessment tax return.

[Mha]

Thank you for advice until now.
Please may I have just one more question as I am getting different advice.
After transfer who pays CGT. My daughter or her ex husband?
Kind regards

[Mha]

Thank you for advice until now.
Please may I have just one more question as I am getting different advice.
After transfer who pays CGT. My daughter or her ex husband?
Kind regards