Post-divorce CGT on properties

[plangon]

I have volunteered to try to get my head around the CGT liabilities of a recently divorced couple and would really welcome advice. From what I have read, I realise that opportunities have been missed for the transfer of property during the tax year in which separation occurred and the Wife may have been away from the family home for too long to be able to claim full PRR. I would appreciate advice as the likely CGT liabilities of both the former Husband (H) and the former Wife (W) and how to calculate them and take advantage of any available exemptions.

Key facts:

House 1 - previously rented by the couple for several months, before being bought for £82K (+ approx £5K costs) in Feb, 1999, in joint names, and lived in, as a family, until Nov. 1999 ( so approx 9 months of occupation as owners) while seeking to buy a permanent family home .

Then, let (on a Buy-to Let mortgage) from 2000 - 2012 with occasional, very short periods of unnoccupancy while house was advertised between lets. In one of the letting gaps, H moved in for about a year. (Is that relevant?)

May 1st 2012, W left H, moving out of House 2 into House 1 which has been her home until the present. ( 4.5 years). H has remained in House 2 until the present.

House 2 - a rural property with a 5 acre field, near, but not attached to house and on the same deeds as house.(The house and land were the last remaining pieces of a former farm.) Bought 5th Nov 1999 in joint names, as family home. Total purchase price was £154K (+ approx £10K costs). Renovation and extension over a 4yr period cost about £120K.

This house was let from 1/8/07 until 31/01/10 (30 months) after which W and children moved back and H lived elsewhere (with family member followed by a 6 months’ tenancy of a flat). H returned to family home in August 2010 and family lived there until W left in May 2012.

A Court order in late December 2015 required that the family home (farmhouse and land) should be sold. Sales costs were estimated by the Court to be £12K. From the proceeds, all debts should be paid (including mortgages) and, upon completion of this sale, House I should be transferred into the sole name of the W. In the Court Order, a valuation of £240K for House 1 was assumed and that figure awarded to the husband from the proceeds of the sale. An offer for the house and land for £550K has recently been accepted and, subject to contract, completion could be expected by Dec, 2016. For CGT purposes, will the period of ownership of the house run to the date of the court order (Dec 2015 ) or the date of the actual sale ( say, Dec 2016)?

Within the last year , or so, the wife has changed her ownership of both houses to Tenants in Common to protect the children’s inheritance.

Decree Absolute was granted at the end of April 2016.

Best course of action for the wife?

As the gain on House 2 ( Farmhouse) will be greater than that on House 1 (say £550K - £296K costs ( £154K + £10K purchase costs + £120k renovation + £12K sales costs) = £254K, is it best for W to claim that for PRR even though she left it 4.5 years ago?
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Is she still ENTITLED to claim that house for PRR and, if so, would such treatment have to be specially applied for? Would it mean that she will not be liable for CGT, at all, or will her liability be calculated in proportion to her period of residency plus the, allowable, last 18 months of ownership? (Out of the nearly 18 years (215 months) of ownership she did not occupy it for 30 months when it was let and for the 56 months since she left on 01/05/12)

If she does have any CGT liability will she be able to benefit from Lettings Relief for the 30 months that the house was a residential let. How much might that be?

When House 1 is transferred into her sole name, will she have any tax liability (either CGT or SDLT) on that? I do not think that she has yet nominated this house for PRR but plans to do so upon achieving ownership of the whole. If she were to sell this house, in the future, would it simply be classed as her Main Residence - and, thus, totally exempt from CGT? Or, if CGT was due, would the gain be calculated from the value when she bought the house in 1999 or from when she gained ownership of the whole in 2016/17?

Tax liability of the husband?

Presumably H will simply nominate House 2, where he will be living until the point of sale , as his Main Residence Will it be a matter of no CGT for him on this property or will the period when it was a Residential Let and the two, shortish, periods when he moved out have to be taken into account?

Re House 1, will H have a straight liability on half of the increase in value from purchase in Feb. 1999 to the present? ( £240K - £87K (£82K + approx £5K costs) = £153K.)

Will the date of transfer be the actual date of transfer or the date of the Court Order which was approximately one year earlier? Will the house have to be valued at the point of transfer or can the Court’s assumed valuation of £240K be used?

What Lettings Relief will be allowed, for him, on an 11 year rental period (interrupted by H living there for one period (of about a year) between lettings?

Issue of the land

It would appear that the sale of the house and land are going through, together, for a global sum (£550K), just as they were bought together on the same deed. We had though this might have been a strategy by the agent and solicitor to avoid the CGT that may be due on the land, if sold separately. However, as the price on the land, at the time of purchase, was £15k and it now seems to be being seriously undersold at £20K (within the £550K) the gain is minimal.

Had the land been marketed as a separate Lot and attracted a much higher price, perhaps £55K, would CGT have been be due on the uplift in value? Or am I right in thinking that there is no CGT payable on land under £60K? Would the fact that it was bought as part of a Main Residence make any difference to the CGT liability? Is any benefit lost if the land were to be sold after the house?

Any observations on the situation I have described will be most gratefully received. I cannot try to calculate CGT until I know that I have understood the rules correctly. If you have read this far - many thanks!

[maths]

I note that a court order was granted in December 2015 and the decree absolute April 2016.

Separation appears to have occurred in May 2012.

It strikes me as very strange that over this time period that the issues you raise have not been addressed, in particular as no doubt solicitors were involved. It is a bit late in the day to now try and resolve the tax issues and, in particular, no tax planning can now be undertaken; the die is cast.

Whilst I appreciate that you have endeavoured to detail the relevant facts there is in fact insufficient information but this will involve further exchanges on an already long and complicated scenario.

It may be that others will have greater patience than me and will offer more detailed advice.

For what it's worth I make the following observations (figures used are only crude approximations):

1. Not sure House 1 qualifies as anyone's main/sole residence. At best it may qualify as such only for W from when she reoccupied it in May 2012 to present day.

2. No election possible to choose which of H1 or H2 is a main residence as at no time were both occupied as residences.

3. H2 owned for 17 years jointly. Appears to have been a residence for W for 11 years.
Gain on sale of H2 for W is 50% of 254K ie 127k of which 11/17ths exempt due to private residence relief (82k). In addition lettings relief of applies 2.5/17ths of 127K (18.5k). Chargeable gain 26k.

4. Position for H re H2 slightly different as he has continued to live there since May 2012.

5. There appears to be not transfer of any beneficial interest from H to W or vice versa under the court order; only that H2 must be sold. I would suggest that the date of "exchange" on H2 is the relevant date. (there are complex rules as to relevant dates on transfers between spouses/ex-spouses but I do not think they apply re H2, although i think they do apply to the transfer of H's 50% interest in H1 to W).

6. On H's transfer of his 50% to W no relief/exemptions apply on any gain H makes as I do not think H1 qualifies as his residence.

7. Lettings relief is not available unless the property concerned was also the individual's sole/main residence at some point during ownership.

[plangon]

Hello "maths", ( So sorry to have called you "math" as in USA!)

I am more than grateful for your willingness to address all that tedious detail and send me a response. You might well ask what has been going on over recent years when we have spent tens of thousands on solicitors' fees to no effect. The whole case is a pig's ear and I deliberately did not include the gory details because I do not think they would actually affect CGT liability. Matters have not been helped by the amount of time it has taken to sell H2.

As you say, the die is cast and the only option, now, is to work out what tax is likely to be due by both parties. You say you have insufficient information. What other facts do you need because I will do my best to supply them? One fact that may be significant, which I did not mention, is that The Court Order not only ordered that House 2 should be sold but that, only upon its sale, H should transfer his ownership of House 1 to W. Also both H and W are basic rate tax payers.

Re your points which are in italics, below:

The wifes position.

3. H2 owned for 17 years jointly. Appears to have been a residence for W for 11 years.
Gain on sale of H2 for W is 50% of 254K ie 127k of which 11/17ths exempt due to private residence relief (82k). In addition lettings relief of applies 2.5/17ths of 127K (18.5k). Chargeable gain 26k.

The good news, here, (and a great relief to me) would seem to be that the CGT liability for W should be covered, comfortably, by her annual allowance.
Does the calculation, below seem fairly accurate for her liability? ( I have deducted the 30 mth period of letting from the length of her residency and added the last 18 mths of her ownership.)

W had 150 months residency (from 5/11/99 until 1/5/12 ) minus 30 months for the letting = 120 months, plus last 18 months = 138 months
Assuming exchange/sale by the end of 2016, H2 was jointly owned for 206 months
PRR is 138/206 of £127K = £85K plus Lettings Relief of 30/206 = £18.5. Total exemptions = approx £103.5K. So £23.5K chargeable at 18% = £4230


Will there be any other possible tax liability for the W upon the transfer to her of H's share of H1? (either CGT, SDLT or income tax)?

) The husband's position

6. On H's transfer of his 50% to W no relief/exemptions apply on any gain H makes as I do not think H1 qualifies as his residence.

7. Lettings relief is not available unless the property concerned was also the individual's sole/main residence at some point during ownership.

Would the husband not qualify for any Lettings Relief on H1 even though it was jointly owned - and the family's only residence - for 9 months (Feb 99 to 5/11/99) immediately prior to the purchase of H2? Also would his occupation of H1 for about a year around 2009/10 not be relevant? (His living there, without the W, coincided with part of the period when H2 was let.)

Or are you saying that if H is claiming CGT relief on H2 because it is his Main Residence, he can't,for the same period, claim any relief for H1? i.e Can he only claim exemption on one property at a time and can he choose which would give him the better result?

Doing rough calculations on H's CGT liability on H2 - When H has lived there for 176 mths (56 months longer than W) - the only sensible course for him would be to claim PRR on that property which should not result in any chargeable gain in excess of his annual allowance.

Transfer rules.

5. There are complex rules as to relevant dates on transfers between spouses/ex-spouses but I do not think they apply re H2, although i think they do apply to the transfer of H's 50% interest in H1 to W.

Are you able to direct me to these complex rules so that I can see whether they are likely to be of any significance?

The issue of the land

Can you point me to any site which will expain the rules concerning CGT on land? Or would you recommend that I post another query on TaxationWeb in order to try to get the answers to the questions below:

Am I right in thinking that there is no CGT payable on land under £60K?
Would the fact that it was sold as part of a Main Residence make any difference to the CGT liability?
Is any benefit lost if the land were to be sold after the house?


Thank you very much indeed for your help.