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Where Taxpayers and Advisers Meet

Estimating CGT liability in 10 years in second home for divorce

vcab01
Posts:3
Joined:Mon Apr 12, 2021 9:08 pm
Estimating CGT liability in 10 years in second home for divorce

Postby vcab01 » Mon Apr 12, 2021 9:28 pm

Hi, I’d be grateful if someone can help me understand the value of the CGT which will be deducted from my house sale in 10 years time for divorce purposes. The house is currently the home for myself and my children and the mortgage doesn’t complete until 2031. It is worth £370k but won’t be sold until 2031/2032 at the end of the mortgage. My ex is in the higher tax bracket and when the house is sold the sale costs and the CGT will be divided between us before he takes his 34%. I will be buying a smaller home out of my 66% share afterwards but he will already have a house hence the CGT. Is the maximum he can be charged 28% as he is in a 40% tax bracket. Also, how do I begin to work out the value of the CGT..I know it’s only applies to his portion, but he’s said it’s only applied to the portion of the increase in value. We had agreed our house percentage based on it “just”enabling me to comfortably rehouse but the CGT could change that so some clarification would be wonderful. Thank you.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Estimating CGT liability in 10 years in second home for divorce

Postby maths » Tue Apr 13, 2021 4:47 pm

Currently, the maximum CGT rate for an individual on sale of a residence is 28%. This rate applies to the capital gain, not the sale proceeds.

Your post is a little unclear.

What % do you each own?

Are you saying that although you will not probably be liable to CGT on any. capital gain on your % ownership, he will be liable to CGHT on his bit, but you only share in the proceeds of sale AFTER his CGT liability comes out of the total sale proceeds?

vcab01
Posts:3
Joined:Mon Apr 12, 2021 9:08 pm

Re: Estimating CGT liability in 10 years in second home for divorce

Postby vcab01 » Wed Apr 14, 2021 4:21 pm

Hi, Yes thank you for your help. My share is 66% and his is 34% I’m a low earner but he is in a high tax bracket. His solicitor has proposed as part of our settlement that the capital gains tax my ex will owe due to him having to rehome is paid by the sale of the house before our % share is allocated. I don’t understand what 28% of the “capital gain” means? Vicky

someone
Posts:691
Joined:Mon Feb 13, 2017 10:09 am

Re: Estimating CGT liability in 10 years in second home for divorce

Postby someone » Wed Apr 14, 2021 5:55 pm

I assume you are going to continue living in it as your home for the 10 years?

Therefore there will be (under current laws), no CGT to pay on your share.

I also would assume your ex used to live there but will no longer. He will have to pay CGT on the increase in value of his share from when it was bought to when it is sold (there is some relief from tax for the periods he lived there)

You don't say how long it's already been owned, not how long your ex lived there. Therefore for this example I'm assuming your ex never lived there and you bought it for 360K.

Your share when bought: 240K (this is called base cost)
You ex's share when bought: 120K (his base cost)

Lets assume it sells for 570K (this is roughly 5% per year appreciation)

Your share at sale: 380K
Your ex's share at sale 190K

Your ex's gain is 190-120 = 70K

Under current rules he gets about 12K tax free and then pays 28% on the rest. so (approx) 16K in CGT tax will be due.

Under the solicitor's proposal:
Proceeds after tax: 570-16=554.

You get: 370K (so you've paid 10K of the tax bill)
your ex gets: 184K (so he's paid 6K of the tax bill)

Only you can decide whether you think this is equitable. I can see reasons for thinking it is fair (if your ex could have his share now he could invest it in his own home and the gain would be tax free) and reasons for thinking that it's not equitable (why should you pay the majority of the tax that is down to your ex being a higher rate taxpayer. You'd pay 18% on some of it if it was your gain - your total bill night not be 10K if it was all your bill. So your paying more on behalf of your ex than you would have to pay for yourself!

I'm not exactly sure how this "you pay his CGT bill works" Because you're paying 10K of his bill so actually he's getting 10K more and you're getting 10K less - but now he has to pay 28% tax on that 10K too. Perhaps there's an easy way around that.

Also note:
CGT rates might change - possibly to 40 or 45%. And CGT allowance might reduce - possibly to only a few K. So tax due could easily be 30K in 10 years time on the same figures due to law changes. And if you're paying 20K of that then there could be yet another 10K to pay - of which you're paying 6K etc. Effectively you'll end up paying almost 30K in tax on his 30K tax bill!

Possibly better would be to give him a few percent more now and let him pay his own tax bill. An extra 3% to him should approximately cover the 16K bill I've estimated above.

(don't rely on any of this. I've done it by "finger in the air" guess work, not calculation)

vcab01
Posts:3
Joined:Mon Apr 12, 2021 9:08 pm

Re: Estimating CGT liability in 10 years in second home for divorce

Postby vcab01 » Fri Apr 16, 2021 3:25 pm

Wow okay, I understand much more now thank you. We bought the house in Dec 2006 for £250k and he moved out around Easter 2016 and our mortgage finishes in Nov 2031, so his share when bought would be 85K and his gain at sale would be 105K so if 12k is tax free he would pay 28% on 93K = 26k tax bill up to £37-£42k if the CGT rates change and allowance reduces which is definitely much more than I expected and isn't something to just disregard and accept in the settlement. Thank you again.

someone
Posts:691
Joined:Mon Feb 13, 2017 10:09 am

Re: Estimating CGT liability in 10 years in second home for divorce

Postby someone » Sat Apr 17, 2021 10:31 am

It's rather more complicated that that.

If you bought in 2006 and he moved out in 2016 then he has 10 years of PPR.

If you sell in 2031 then that's 25 years of ownership.

So his gain is reduced by 10/25.

105K gain reduced by 10/25 is 63K

Less 12K allowance is 51K.

Tax@28% is about 14K.

But again, I can imagine that PPR on homes you haven't lived in for 15 years could also be lost. (We don't know what the government might do but unfortunately the popular view is that people with second homes should be penalized without thinking of people in your sort of circumstances where you're a victim of circumstance rather than "loaded")


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