Divorce and property settlement

sbarns

I’m currently going through a separation and ultimate divorce and am looking for some advice regarding a jointly owned buy-to-let property. We originally decided to sell the property and split the equity 50/50 but due to lack of interest I have decided to buy my husband out of the property and keep it as a future investment for our children. We are currently disagreeing on how to value the settlement that I owe him. I believe that I should pay him the amount he would have got if we had of sold the property which means working out the capital gains tax that would be due and deducting that from the total equity - he would get 50% of the remaining amount. He disagrees and thinks I should give him the full 50% equity (not including any capital gains tax deduction) as capital gains tax won’t be physically paid at this time. 
By his method I would have to pay him significantly more now than he would get if we sold the property and in the future when I do sell I will not have the benefit of sharing the CGT liability with him as a joint owner. As such not sure this would be a beneficial settlement to me. 
Is anyone able to provide some advice on how this should work in a fair and equal way? 

missile

How much CGT would you be liable for? i.e. is it really worth arguing over? It is you who wants to retain the property and the onus is on you to reach an amicable arrangement. It would be much easier to sell the property.

Slithery

As husband and wife the property is owned equally between you. Why shouldn't you be liable for your share of its gain in value?

GDB2222

sbarns said:

I’m currently going through a separation and ultimate divorce and am looking for some advice regarding a jointly owned buy-to-let property. We originally decided to sell the property and split the equity 50/50 but due to lack of interest I have decided to buy my husband out of the property and keep it as a future investment for our children. We are currently disagreeing on how to value the settlement that I owe him. I believe that I should pay him the amount he would have got if we had of sold the property which means working out the capital gains tax that would be due and deducting that from the total equity - he would get 50% of the remaining amount. He disagrees and thinks I should give him the full 50% equity (not including any capital gains tax deduction) as capital gains tax won’t be physically paid at this time. 
By his method I would have to pay him significantly more now than he would get if we sold the property and in the future when I do sell I will not have the benefit of sharing the CGT liability with him as a joint owner. As such not sure this would be a beneficial settlement to me. 
Is anyone able to provide some advice on how this should work in a fair and equal way? 

This is an interesting issue, which crops up in finance quite often. Many sets of company accounts have this hidden away in the small print. It just doesn’t crop up much in private life.

You will have an increased CGT bill in the future, and valuing this liability is quite difficult. You don’t know when you will sell the property and have to pay the tax, and you can only guess at the tax rates at the time. In finance, the future liability would be discounted to allow for the interest you can earn in the meantime, but that all seems a bit too sophisticated in the circumstances 

I suggest that you allow for say three quarters of the tax as a reasonable compromise 

bouicca21

How much money is actually involved?  What sort of crystal ball do you have to predict future tax rates and property values?  

You have factored in all assets haven’t you, like pension pots?

Personally I think forgoing some of the haggling is worth it in order to get a reasonably amicable clean break.  

steampowered

Your husband would pay CGT if he was to sell his 50% share in the property to anybody else. Yet you will need to pay CGT based on the original purchase price when you sell. You will be "taking over" your husband's capital gains, in a way you would not be doing if the property was sold and the money used elsewhere, so it seems fair that CGT should be taken into account.

The way you are calculating CGT is not quite correct - I suspect your method over-estimates your husband's CGT liability. You do not deduct CGT from the total equity - CGT is paid by the individual on receipt, not on the property.

I would calculate it as follows:
-  Take the value of 50% of the property, and deduct 50% of the original purchase price. This is your chargeable gain.
- Deduct the annual allowance of £12,300.
- CGT is 18% or 28% on the result (depending on you and your husband's tax status).

sbarns

Apologies when I say deduct CGT from total
equity I meant calculating the CGT first based on the correct methodology (this has been done already by an accountant who calculates we would owe £20k each if we sold). In this instance I would pay my husband his share of equity in the property (after mortgage value deducted) less £20k. Mortgage is £180k and property is worth £335k so equity in the property at current market value is a total £155k. 

All other jointly owned assets are being split 50/50 for clean break so we are not taking into account pension pot details. 

Keep_pedalling

I don’t understand this, you are buying his share and he needs to pay any tax on his gain in full. You still have  a potential CG which will kick in when you eventually sell. If you pay part of his tax bill you will loose out in the long run. Why should he pay less tax than if a total stranger buys the house?

GDB2222

Transfer between husband and wife are tax free. I assume that this would all be done before the decree.

Angela_D_3

Have you got a solicitor?  Although they dont always get it,  my exs was banging on about stamp duty being due on a transfer arrangement for ages in court.  

Worth running this past a solicitor and gettimg them to explain it all to ex. 

sbarns

Keep_pedalling said:

I don’t understand this, you are buying his share and he needs to pay any tax on his gain in full. You still have  a potential CG which will kick in when you eventually sell. If you pay part of his tax bill you will loose out in the long run. Why should he pay less tax than if a total stranger buys the house?

Yes I agree, this is what I believe. Despite not selling the property now I think the transaction between us to transfer the property should be the same as if we were selling in order to agree a settlement amount for me to pay him.