Tax Implication on Divorce

[caffe]

A couple are about to separate and they wondered how best to do this to minimise their tax liabilities.

They own 2 properties bought jointly owned 50/50.
A 3 bed family home and a 1 bedroom flat which has been let out for the last 15 yrs (their first home).

They have decided to divorce now and divide all their finances except for the properties which they intend to sell once their youngest is 18 (4 years time). All costs related to the upkeep and finance will continue to be paid on both properties 50/50.

The husband will move into the buy to let (bought in 1996 £105k - value now £450k)

The wife will remains in the family home (bought in 2004 £450k , value now £1.3m)

Will the husband be liable for CGT on the family home? What is the implication of CGT on the buy to let if the husband resides there?

Any advice on how to help them would be welcome.

Thanks

[maths]

Will the husband be liable for CGT on the family home?

Yes, husband will in principle be exposed to CGT on the gain attributable to his interest assuming (which appears to be the case) that the property is sold more than 18 months after he moved out of it. However, private residence relief will apply to most of his period of ownership and so possibly any CGT liability may be minimal (the longer it's been owned the lesser any CGT liability).

What is the implication of CGT on the buy to let if the husband resides there?

Wife will have a CGT liability on the sale of her interest with some (albeit it seems minimal) private residence relief but also lettings relief.
Husband in same position although his private residence relief should be greater.

[caffe]

Thank you Maths.

Would a 'mesher order' on the main residence or both have any benefit to the individuals in the long term?

[maths]

Bit difficult to advise in a vacuum.

However, re the matrimonial home not sure much would be gained if my assumption is correct that any CGT liability on part of husband will be minimal due to PPR, last 18 months and annual exempt amount.

[caffe]

A follow on question on this question:

Before Divorce:

If the wife were to transfer her share of ownership in the 2nd property holding only 1% (Husband 99%).
At the same time the equivalent cash value of the transfer is transferred over to the wife in the marital home.
In this case assume 65% to the wife / 35% to the husband.

Could the divorcees retain the joint mortgages on the properties?

Do the need to inform HMRC of transfer of ownership ?

[maths]

If the only proposed changes are to the beneficial interests in the two properties with the holders of the legal titles remaining unchanged, the mortgages simply continue.

The transfer of beneficial interests after the end of the tax year of separation will not qualify as inter-spouse transfers for CGT. They will therefore constitute disposals for CGT and potentially CGT liabilities may arise.
If private residence relief applies to any of the transfers covering the whole period of ownership then HMRC do not need to be informed with respect to that particular disposal.
Where lettings relief is to be claimed then disclosure to HMRC is necessary.

[caffe]

The solicitor in this case as advised the following>

1) Prepare a Declaration of Trust transferring the equity in the BTL into husband’s sole name (costs of preparing the Declaration of Trust to be shared equally)
2) Calculate the net value of BTL as at the date of transfer.
3) Enter into a Mesher Order in respect of the sale of marital home, with the same trigger events as per agreement, with the proceeds of sale to be applied as follows:
a. Payment of any outstanding mortgage;
b. Payment of any costs of sale;
c. Wife to receive a lump sum equivalent to 50% of the net value of BTL,
d. The balance of the equity to be divided 50/50.

4) Wife to indemnify Husband in respect of the mortgage on marital home.
5) Husband to indemnify Wife in respect of the mortgage on the BTL flat.
6) Upon the sale of marital, Husband to procure Wife’s release from the mortgage on BTL either by selling the BTL flat or by utilising some of the money released from marital home to pay off the outstanding mortgage

If the husband decides to sell the BTL property will he be liable for CGT on the entire amount including the 50% transferred over from his wife? If they both retained a 50% share could they then both claim lettings relief on any of the gain?

Wife Husband
Proceeds £450,000 225,000 225,000
Cost £105,000 (52,500) (52,500)
Gross Gain 172,500 172,500
Less:
Private residence relief 4.5/21 x 172500 (36,965) (36,965)
Lettings Relief (40,000) (40,000)
Annual Allowance (11,100) (11,100)

Net Gain 84,435 84,435

Tax at 28% 23,642 23,642