Capital Gains Tax in Divorce – Deal or No Deal?

by Readers Question

11:05 AM, 15th February 2015
About 4 years ago

Capital Gains Tax in Divorce – Deal or No Deal?

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Capital Gains Tax in Divorce – Deal or No Deal?

I am just hoping for a little bit of advice as my solicitor has my head in a spin and has suggested looking at getting advice elsewhere. Capital Gains Tax in Divorce

I am currently in the process of splitting with my wife,  I moved out of the marital home in April last year. We have a buy to let property, it was bought when we were married as a joint venture but the mortgage was taken in her name alone. As part of the divorce I am allowing my ex to have the marital home and she wants to give me the rental property in return which I plant to sell. However, today I got a letter from my solicitor saying that the full capital gains tax on the property will all be at my feet when the transfer goes through. Is this correct, would the capital gain for the whole period the property has been let out transfer to me even though the transfer into my name will only be taking place next month? The property was bought for £130,000 and now sits at around £250,000. Can I be responsible for the capital gain on all of this amount?

To muddy the waters further, when the split first happened in April I moved into the property for 6 months but have now moved out and am renting it out again. Does this give me a exemption as it was my main residence for 6 months?

The final thing is my Ex is pushing for the transfer to be done in the calender year so I believe she avoids any CGT as the transfer is happening in the same tax year. If the transfer does not happen this year is she then culapbale for some of the CGT?

Sorry for all of the questions but I am in a minefield which I know very little about. Any advice would be greatly appreciated.

Nick



Comments

Mark Alexander

11:28 AM, 15th February 2015
About 4 years ago

Hi Nick

It seems pretty clear to me that your ex has been given quality advice and that you possibly haven't.

It is difficult for me to provide guidance in the absence of the full facts but my initial thoughts would be that you say "No Deal!"

CGT on transfers between spouses is exempt. This exemption also extends for one year beyond separation. That's why your ex is so keen to make the transfer prior to April.

The fact that you lived in the property as your principal private residence for 6 months will help to reduce the CGT when you sell it. Even though you only lived there for 6 months you should be able to claim 18 months of PPR relief.

At the point of sale the purchase price will be deducted from the sale price to ascertain the capital gain. The next calculation will be to divide that gain by the number of months the property has been owned for. We will call that figure A. Then you need to deduct 18 months from the total number of months of ownership. We will call that figure B. Then multiply figure A by figure B to establish the amount of gain which will be taxable. We will call that figure C.

You then add figure C to your earnings for the year to establish whether the gain will take you into the higher rate tax band. From what you have said I suspect that will be highly likely, especially if you have owned the property for for that 36 months.

From figure C you will then need to deduct the personal CGT exemption allowance during the year of sale. Let's call that figure D.

The tax bill of sale would then be figure D X the either 18% of 28% depending on whether the higher rate applies or not.

If you wait until May to do the transfer your ex will no longer be able to claim the CGT exemption between spouses. In other words, she will become responsible for paying the CGT on the transfer to you.

Armed with this information you now have a better poker hand to play.

I do offer one to one Consultancy and divorcing landlords make up around 20% of my clients. I also have a joint venture partnership with a specialist buy to let conveyancing firm who may be able to help you restructure a much better deal. I really don't see why you should agree to take the entire CGT hit and I can also think of a way where she could reduce her CGT liability if you were to agree to share the liability 50/50.

For details of the Consultancy service I offer please see >>> http://www.property118.com/consultancy-mark-alexander/61522/

For details of the joint venture conveyancing firm I've mentioned above please see >>> http://buytoletconveyancing.co.uk/
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Shakeel Ahmad

20:29 PM, 16th February 2015
About 4 years ago

Agree with Mark, 100%. If you complete before April i.e. one year after divorce your wife could save £30,800 of CGT and this amount can be calculated using Marks above CGT calculations.

It seems that your wife had not lived in the property. She will not be able to claim ant reliefs. The only relief she will be able to claim will be her annual CGT allowance which £10900 +/- ,this is if she has not already claimed this for the year.

The above means that your wife had made a gain of £ 110,000 ( £250--130-10=£ 110,000 ) 28% of £ 110,000 =£ 30,800

I am ignoring stamp duty, legal fee, Agents fee etc.. The above gives you a negotiation power £30,800 as your hand in the game of Poker.

Neil Robb

21:31 PM, 16th February 2015
About 4 years ago

Hi

Can you not just live there as you main residence for a number of years then sell.

Mark would know more than me.

Shakeel Ahmad

22:20 PM, 16th February 2015
About 4 years ago

Yes, you can if it is your private & principal residence.

I am assuming that you & your wife did not live in the property and it was rented for the whole of the period of ownership by your wife.

I think you are confused. The property is owned by your wife and when it is sold and or transferred to you. Your wife becomes responsible for the capital gains tax because she is the one who owned the property as per the land registry & she perhaps also declared the rental income on her tax return.

Once you start living in it. It will become your private & principal residence and there will be no capital gains tax be payable by you during your period of occupation.

Mark Alexander

22:34 PM, 16th February 2015
About 4 years ago

Nick

I have reconsidered this and I'm beginning to question parts of my original post.

If the property always was in your ex-wifes name then the period in which you occupied it may not count.

Also, if the divorce settlement is more than a year after separation I think Shakeel may well be right. I also suspect that if this is the case then the CGT clock will only start ticking for you as of the date and value of the transfer.

Please, PLEASE, PLEASE seek professional advice on this. It could save you 10's of thousands of pounds.
.

Mark Alexander

23:31 PM, 16th February 2015
About 4 years ago

Hello again Nick

No wonder your head was in a spin, I think I managed to confuse myself for a while too.

I'm as confident as I can be that the guidance I offered on my first post is right if you complete the deal before April.

However, my second comment is also right if you complete the deal after April.

DEFINITELY take professional advice on this, it will be a nightmare for you if you don't!
.


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