Capital Gains Tax and Divorce

Hutch143

Good evening, I have read a couple of your previous replies and you appear to be very knowledgeable about CGT in divorce proceedings so I wondered if you would be able to help.
Me and my husband have not lived together since the middle of 2010. I moved out of the marital home and rented privately until May 2016. We have no children, we bought the marital home approximately 20 years ago and then bought a second property approximately 15 years ago. My mum and aunty were living in the second property rent free but both have since passed away so the house has been empty since August 2017. My husband still lives in the marital home.
We weren't in any rush to divorce or sort out the financial side of things but did not know that this would cause financial issues with regards to CGT and Income Tax. Before we realised the implications we decided to start divorce proceedings and agreed between us to take one property each (him to keep the marital home and me to keep the second property) and for him to give me a lump sum of £90k to even out the values of the properties. He would have to take a mortgage to pay me the £90k. There is no mortgage on either of the two properties as we paid them off number of years ago. What will happen with regards to CGT and tax on the cash sum? If we had tried to live together again within the last 12 months, would this have any affect?

SuperHan

You are disposing of your share in your family home. He is disposing of his share in the second property.

If the transfer happens while you are still married, any consideration for these disposals is ignored and they are deemed market value transactions (ie you pretend that you received market value when calculating any capital gains tax due).

Your share in the family home will attract Principal Private Residence (PPR) Relief. You get this for the whole time you live in it, and provided you have not acquired another PPR (which is unlikely given that you are now renting), you will get it up until the date of the disposal. You are therefore unlikely to have any CGT to pay.

Your husband, however, is disposing of a property that is not a PPR (I assume you've not made any elections to the contrary). He will have a capital gains tax charge on the difference between market value and the amount he originally paid for his share of the property.

If you wait until after you are divorced, however, the market value rule won't apply and you would look at actual consideration paid. In that instance, he would arguable be disposing of the second property for the value of the share he receives in the family home plus £90k. He would pay capital gains tax on the difference between this value and the price he originally paid for his share. Given you are squaring up values with the cash payment, there may be no difference in the pre/post divorce tax payable.

Living together in the last 12 months would not help. You get nil gain nil loss transfers for the tax year in which you separate. Even if this was considered to be 2017/18, you'd have to execute the transfer before midnight tonight as tomorrow is a different tax year and you would go back to the market value position referred to above.

Hutch143

SuperHan, thank you for your reply, I think I understand the majority of it. Do you know if we are considered to be married up until a Decree Absolute is issued or would the date of separation be taken into account?
Also, would I be liable for Income Tax on the 90k cash settlement? If we were still living together and married, could the 90k be 'gifted' to me tax free?

00ec25

Hutch143 wrote: »

SuperHan, thank you for your reply, I think I understand the majority of it. Do you know if we are considered to be married up until a Decree Absolute is issued or would the date of separation be taken into account?
Also, would I be liable for Income Tax on the 90k cash settlement? If we were still living together and married, could the 90k be 'gifted' to me tax free?

for tax purposes:

You and your spouse or civil partner are treated as living together unless you're separated:
a) under a court order
b) by a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed)
c) in such circumstances that the separation is likely to be permanent

the one that catches people out (or can be used to their advantage if not yet at divorce stage) is obviously c)

have you read this?
https://www.gov.uk/government/publications/husband-and-wife-civil-partners-divorce-dissolution-and-separation-hs281-self-assessment-helpsheet/hs281-spouses-civil-partners-divorce-dissolution-and-separation-2017

silvercar

Also, would I be liable for Income Tax on the 90k cash settlement? If we were still living together and married, could the 90k be 'gifted' to me tax free?

It isn't subject to income tax.

SuperHan

You are married until your decree absolute (and so are related parties until that point).
You lose the nil gain nil loss treatment in the tax year after your permanent separation.

Technically, the £90k could be gifted to you tax free as there is no lifetime tax to pay on cash gifts. However, the matter of the fact is you're getting the £90k in exchange for giving up your share in a property, so it's proceeds for a capital gains tax disposal.

That aside, if you do the transfer before the decree absolute is granted, the tax position is the same whether you get the £90k or not, as you are taxed on the market value of the property you dispose of. In a way, you may consider the £90k to be tax free in this situation (as you are paying tax on a notional amount, not the £90k you're actually receiving).

Hutch143

Do you offer phone/face to face support Superhan by any chance .?
We are in West London

Gill and Paul

00ec25

SuperHan wrote: »

You are married until your decree absolute (and so are related parties until that point).
You lose the nil gain nil loss treatment in the tax year after your permanent separation

maybe I am misreading this sentence but:

The no gain/no loss; treatment continues to apply to transfers between spouses or civil partners throughout the whole of the (tax) year in which separation takes place, even though the spouses or civil partners may not be 'living together' at the time of transfer.

If a divorce or dissolution of a civil partnership takes place in the same tax year as separation, the no gain/no loss; treatment applies to transfers of assets made after that divorce or dissolution, but before the end of the tax year.

The definition of living together is given in ICTA 1988/s 282. A woman is treated as 'living together' with her husband unless she is (a) separated under a court order, (b) separated by a formal deed of separation or (c) separated in such circumstances that the separation is likely to be permanent.

A couple may be separated even when they are still living in the same house (Holmes v Mitchell STC 25) - for example, because financial considerations make alternative accommodation unavailable for one spouse or civil partner, or where the parties want to minimise the initial impact of the separation on their children.