Capital gains, divorce and rental property

Jet

I am asking this on behalf of a friend.

He and his ex wife owned a rental property for a number of years. They both lived together in a rent free house that comes with employment.

When they seperated the property was sold and 70% of the equity was taken by the wife (and used to purchase her main residence) and 30% by the husband (used as a deposit for another rental property). As far as they are aware they did not pay capital gains tax and I'm just wondering if they should have done so. The total equity would have been around £90,000.

They lived in the property for around 3 years out of about 13 years of ownership.

John_Pierpoint

If you dispose of an asset worth 4 x the nil rate allowance (currently 10,100 x 4) then you are required to account to HMRC even if you have not made a capital gain.
(I've posted on here before my pain at wasting time calculating how much tax I did not owe to HMRC when selling an interest in a house - my letter saying "..........there cannot be any tax to pay" was not acceptable).

Might get away with it might not?
Were they paying Income tax on a rental profit?

I would guess that this example is probably still current:
http://www.telegraph.co.uk/finance/2744493/Letters-to-Lorna.html

There are plenty of threads on here discussing the taxable profit and "generous" allowances for selling a house that was once a principal private residence and the rules for occupying a "tied residence" instead.

mel19632

Hi Jet, your friend will likely be liable to capital gains tax.

As he lived in the property for 3 years, this portion of the gain will be exempt, as will the final 3 years of ownership (i.e. he will be taxable on 7/13 x gain).

If it was rented, he will also get up to £40,000 lettings relief (or the total amount of private residence relief already claimed i.e. 6/13 x gain, or the amount of the chargeable gain).

For the time which they were living in work accommodation may be exempt from CGT as well (if abroad its the whole time, if in UK its 3 years).

Finally, there is an annual allowance (currently about £10k each if they both own it) which will further reduce the gain.

So its possibly not as bad as you think, but there may have been some tax to pay.

The HMRC office can be helpful in situations like this so may be worth ringing them too.