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11:53 AM, 28th February 2022, About 2 years ago 21
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Hi all, In brief, this is the background of my situation:
I Own 2x BTL properties as tenants in common with my now ex-wife, split as 80/20 %.
There is an existing Declaration of Trust which splits the income 80/20 as well, in her favour.
Properties both have a small mortgage on them – approx. £52K on each BTL.
Property values are in the order of £240, 000 each
We have a financial consent order (FCO) which has been sealed by the court.
The financial consent order grants me the 2 BTL properties.
FCO was granted on 18th Feb 2022, and decree absolute granted on 24th Feb 2022.
The FCO states that I must indemnify my former spouse against payments or charges related to the mortgage, if she cannot be released from the current mortgages.
The FCO states that I must indemnify my former spouse against current/future CGT liabilities.
Issues:
We have 56 days to complete the directions in the FCO.
The end of the current tax year is looming, and so we must execute the property related transactions prior to 5th April 2022 in order to take advantages of the tax breaks regarding CGT, within the current tax year of divorce.
Option 1:
Transfer legal ownership of properties to my sole name, and obtain the permission of the mortgage company to remove my ex-wife from the mortgage.
Option 2:
Leave legal ownership as is, and execute a further declaration of trust, making me the beneficial owner of the income and underlying property assets.
Pro/Con
Option 1:
Requires the mortgage company to release my ex-wife from the mortgage
Requires me to pass financial affordability tests with current lender – I’m 3 years into a 5 year fix – so would prefer not to redeem mortgage. I work as a contractor, and so this could present a hurdle with my lender in terms of fitting their standard lending criteria.
This option would slow down matters, and I may miss the 5th April deadline which would be catastrophic for me in terms of CGT.
It keeps things tidy, as I would be transferring both legal and beneficial ownership to my sole name.
Option 2:
As I am not changing the legal ownership at HM Registry, only the beneficial ownership, I do not need to get my lender involved.
It’s going to make the process quicker to execute.
It leaves things slightly messy, as whilst I would be 100% beneficial owner, the underlying legal ownership is still split 80/20 in favour of my ex.
Questions:
For option 2, what I do not know is:
a) What are the CGT implications of doing this in terms of future sale of the properties?
b) As am only changing beneficial ownership not legal ownership, would this mean I would need to obtain my ex-wife’s consent for any future sale?
c) Would my ex-spouse have to update her will to pass legal ownership onto me in the event of her death?
d) The FCO which has been sealed by the Courts and awards me 100% of BTL properties, does this give me sufficient protection further down the road, if I go option 2 route?
e) For both options, as this transfer is in connection with a divorce, so long as I complete within the current tax year, should the transaction be free of SDLT?
f) My assumption for both options, is that legal ownership and beneficial ownership are separate, and that in terms of CGT liability – HMRC is only interested in beneficial ownership, not legal ownership?
g) As the FCO gives us both 56 days from 18th Feb to execute the property transfers (which would take us past the 5th April), does the FCO alter how HMRC would
look at the matter in terms of CGT and SDLT, so long as everything was completed within the 56 day limit specified?
Finally, are there any other options I haven’t considered, which I perhaps could consider or any other immediate of future pitfalls?
I’m not expecting all my questions to be fully answered but I would like to know from Mark, given this background, is this something his tax planning consultation would cover?
Thanks in anticipation of any help and guidance.
Paul
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Olls63
15:16 PM, 3rd March 2022, About 2 years ago
The "tax breaks" apply to the year of permanent separation. not the year of divorce.
Paul Hawkins
15:18 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Olls63 at 03/03/2022 - 15:16
In this case, both the year of separation and divorce are in the current tax year 2021/2022.
Chris Bradley
15:54 PM, 3rd March 2022, About 2 years ago
As form 17 between spouses requires the legal ownership to match the income share, I'm not sure how HMRC would see this.
When a house is sold the capital gains tax paperwork would look at the legal owners registered at land registry. Tenants in common is only a term on the title deed which stops the house sale unless both people agree.
Personally if I was the X I wouldnt want my name on properties that were not mine, as I would potentially get hit with second home stamp duty as I would be on the titles of the buy to lets
Paul Hawkins
16:52 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Chris Bradley at 03/03/2022 - 15:54Chris,
That's not my understanding for the use of Form 17.
By default, if you jointly own a property, HMRC will assume you own and have the beneficial ownership split 50/50.
If you own as tenants in common and split in unequal shares, by default the legal ownership and beneficial ownership are deemed to be in the same proportions as the share of ownership.
Form 17, alongside a declaration of trust, is used to split beneficial ownership in different proportions to legal ownership.
See, HMRC Tax Manual https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9851
Chris Bradley
20:33 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Paul Hawkins at 03/03/2022 - 16:52
That is what I said the ownership split needs to match the income share.
Olls63
20:40 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Chris Bradley at 03/03/2022 - 20:33
You said "When a house is sold the capital gains tax paperwork would look at the legal owners registered at land registry" which implies the opposite to what Paul said.
CGT always follows the beneficial ownership, not the legal ownership. See CG22020.
Chris Bradley
20:42 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Olls63 at 03/03/2022 - 20:40
But as HMRC will only allow spouses to split beneficial income in the same proportion as ownership share, then it will be the same.
Paul Hawkins
21:45 PM, 3rd March 2022, About 2 years ago
Reply to the comment left by Chris Bradley at 03/03/2022 - 15:54Chris, do you have an HMRC Tax manual reference (or other reliable source) to support your statement that - "As form 17 between spouses requires the legal ownership to match the income share, I'm not sure how HMRC would see this."
This is exactly the opposite of what Form 17 is for. Its purpose is to split the allocation of beneficial ownership in a different way to the legal ownership. So it is possible to legally own a property split as 50/50 but split beneficial ownership 70/30 or 99/1 or in my case 100%.
Chris Bradley
0:42 AM, 4th March 2022, About 2 years ago
Reply to the comment left by Paul Hawkins at 03/03/2022 - 21:45If property is owned in an unequal share then HMRC will still assume that the income is 50:50 unless a form 17 is submitted that tells HMRC to tax according to actual ownership.
The basic rule (As set out in s836 ITA 2007), which applies as long as the couple are married or in a civil partnership and living together, is that income from property held in both their names is split equally between them for income tax purposes. This applies regardless of whether they are actually entitled to benefit equally from the property. Such jointly held property might include land and buildings, savings accounts, certain shareholdings and intellectual property.
There are some exceptions to this rule including:
Income from partnerships
Income from furnished holiday lets, whether in the UK or overseas
Income from jointly held shares in a close company
Income from an asset held for the couple by a nominee
Where this basic rule does apply, a couple who own an asset where one party is beneficially entitled to (say) 90 percent of the asset and the other to 10 percent, would each be subject to income tax on 50 percent of the income from the asset. On a sale or other disposal however, the capital gains tax position would still follow the underlying 90/10 split. The inheritance tax position would also be split 90/10.
If the couple wishes to be subject to income tax on their actual beneficial ownership instead of on the deemed 50/50 basis, then they need to make an declaration using form 17.
Making a declaration using form 17 overrides the deeming rule. That means each of the couple is subject to income tax on their actual beneficial ownership. Making a declaration cannot change the beneficial ownership of the asset. If the couple owns the property 90/10, then they cannot use form 17 to declare a 25/75 split for income tax purposes.
Chris Bradley
0:55 AM, 4th March 2022, About 2 years ago
Reply to the comment left by Chris Bradley at 04/03/2022 - 00:42
So form 17 doesnt allow you to split the income different to ownership, it simply tells HMRC to ignore the 50:50 assumption of spouses and to tax the income in the same proportion as ownership.
I used to own 99:1 and form 17 allowed us to be taxed in the same proportion, when circumstances I changed I gifted my spouse 29% of the ownership and then submitted form 17 to tell HMRC to tax us 70:30 and the ownership document was the proof they asked for