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Where Taxpayers and Advisers Meet

CGT Indemnity via Consent Order

RibZed
Posts: 4
Joined: Fri Aug 09, 2019 10:41 am

CGT Indemnity via Consent Order

Postby RibZed » Fri Aug 09, 2019 11:13 am

Hi

I would be grateful for some advice please in respect of a CGT claim that HMRC are making against my Sister In Law (will shorten to SIL) and whether she should respond to requests for information from HMRC.

It's a little complex as this relates to a multi-year co-habitation dispute that was finally settled via mediation over 2 years ago:

- My SIL and her partner 'sold' approx. 50% of their primary residence to his parents in 2004 (i.e his parents paid £200k for a property valued near £400k)
- My SIL and her partner remained on the title deeds and the mortgage of the property
- His parents moved into the property and they moved into a new primary residence
- My SIL separated from him over 9 years ago now and only achieved settlement in April 2017

The mediation settlement resulted in an agreed Consent Order which stated that - in respect of the above property that his parents lived in - she would convey/transfer all of her interest in that property to him for the sum of £900. This would then involve releasing her from the joint mortgage or him getting out a mortgage in his sole name.

After a number of months, it was found that he could not release her nor secure a new mortgage so he asked to sell the property instead. He also did not have sufficient funds to pay what he agreed in the Consent Order so needed to sell the property to raise this capital.

This resulted in a revision to the Consent Order - sealed by the Court - which confirmed that he would pay / settle the claim from the sale proceeds of the property and that:

"...to the extent that either of the parties incur any liability in respect of CGT in respect of [specific property name] the Defendant (i.e. him) shall be responsible for discharging such tax and shall indemnify the Claimant (i.e. her) for any CGT she incurs in respect of the sale in joint names of [specific property name]"

My SIL has now received a questionnaire from HMRC as they believe she is liable for CGT from this sale - they have asked a number of questions around when the property was sold, purchase price, how much she received etc etc During their telephone conversation, HMRC actually said SHE was liable for the CGT and would need to chase her ex-partner to recover the funds...obviously this is not a viable course of action given it took 7 years to get to a settlement after they split!! Also, isn't the Consent Order legally binding as it was sealed by the Court....can HMRC just ignore that?

Should my SIL respond to the HMRC questionnaire as openly / honestly as possible or should she advise that the Consent Order means that she is not liable because her ex-partner indemnified her from any claim and is liable for all CGT? Just don't want to dig any holes by responding!

Thank you in advance

Rich

AGoodman
Posts: 886
Joined: Fri May 16, 2014 3:47 pm

Re: CGT Indemnity via Consent Order

Postby AGoodman » Mon Aug 12, 2019 11:57 am

1. She needs proper advice. It's not horribly complex but it is important to get it right first time.

2. You've set out your question well but you need to clarify exactly what interest your SIL held in the property at the various stages. The text below is ambiguous.

"My SIL and her partner 'sold' approx. 50% of their primary residence to his parents in 2004 (i.e his parents paid £200k for a property valued near £400k)". Did the document state that the parents were buying a 50% equitable interest so that SIL and her then husband retained 50%?

3. Yes, she needs to reply. This will not go away and failure to reply will only make it much worse. However, her reply should make the position clear and explain why (if) she has no liability. This may well be based on her having a limited beneficial interest in the property. HMRC could be under the impression that she was the joint beneficial owner when she sold and just answering their questions is unlikely to tell the full story.

4. There are two occasions when she could have made a gain: (a) when she sold her interest to her then current/former husband as the exemption does not apply if they are separated and (b) on the subsequent sale of the property. Part PPR relief should apply to any gain.

5. If there is any CGT payable then she will be personally liable to HMRC but have a right to recover it from the ExH under the indemnity. You can't escape liability to HMRC by agreeing with a third party that they will pay it. The consent order is just an agreement between her and her exH, it doesn't bind HMRC.

RibZed
Posts: 4
Joined: Fri Aug 09, 2019 10:41 am

Re: CGT Indemnity via Consent Order

Postby RibZed » Mon Aug 12, 2019 12:10 pm

Dear AGoodman

Thank you very much - that is an incredibly helpful, concise and clear response.

Much appreciated.

Rich

RibZed
Posts: 4
Joined: Fri Aug 09, 2019 10:41 am

Re: CGT Indemnity via Consent Order

Postby RibZed » Mon Aug 12, 2019 9:24 pm

Dear AGoodman,

In respect of point 2, I suspect this could be a sticking point and HMRC may refuse to accept her Beneficial Interest dropped to 25% at that point. It was a verbal agreement at the time, although my SIL does have an open letter from the parents (from 4 years ago) during the dispute confirming that this is what happened. Worst case scenario I guess is that they hold her responsible for 50% of the CGT and she has a greater sum of money to try recover from her ex!

For Point 4, your response has made me understand this much more clearly and it is probably a little more simple than I made it sound. My SIL and her ex originally bought the property as their family home in 1999 - so I guess this is what HMRC would take as the Purchase price. She didn't actually sell any interest to her ex - there was just that verbal agreement that his parents bought 50% and then moved in when they moved out, thereby reducing her beneficial interest to 25%. This 'transaction' took place in 2004. The property was then sold after settlement in August 2017 - so this would be the sale price that HMRC would use.

The Gross gain between 1999 and 2017 is just under £400k....and I did some reading up on the PPR calculation which was really helpful (thank you for the prompt). Their period of ownership was 224 months (Jan 1999 to Aug 2017) and their period of occupation was 70 months (Jan 1999 to Oct 2004) plus the 18 month Final Period Exemption making a total of 88 months. In all, I think this gives rise to a net Capital Gain of £150k - so I guess the issue is then about how much of the tax resulting from that gain is directly payable by her, for her to recover from her ex.

Thanks again for the excellent response

Rich

RibZed
Posts: 4
Joined: Fri Aug 09, 2019 10:41 am

Re: CGT Indemnity via Consent Order

Postby RibZed » Mon Aug 12, 2019 9:33 pm

Oops...made a mistake in the post. The PPR relief is £150k and the Chargeable Gain is therefore closer to £230k


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