CGT on transfer of properties through Divorce

jamgar

Hi, hoping someone can help...

Background:

• Married for 15 years.
• 2 children
• I moved out of family home into rented accommodation November 2019, (wife is in family home)
• Family home purchased in approx 2010 for £435,000 with a current valuation of approx £650,000 (270k mortgage)
• Have a jointly owned second home that we rent out purchased in March 2018 for £465,000 (without a mortgage) with a current valuation of approximately £550,000.

Transfer of properties:

Although living separately (and not legally separated) or began divorce proceedings. In order for us to move on and me to look to purchase my own home rather than being in rented accommodation we have transferred the following assets as of last month:

• Family home has been transferred from joint ownership to My wife
• Second home has been transferred from joint ownership to Me + a payment of £115,000 from me to my wife (which allows my wife to remain in the family home with a mortgage based solely on her earnings 

Current position:

This leaves:

• My wife living in the family home (no need to sell and a mortgage of £160k)  
• I now have the property that is let out, with a £115,000 mortgage on (raised as payment to wife) that we agreed is my responsibility to continue cover 100% of the kids school fees throughout the kids education and this provides the income to do so (I can therefore not move in/sell for at least 5+ years)
• I remain in rented accommodation

We are now looking to get divorce proceedings underway and obviously want to minimize CGT exposure which from my understanding as long as the separation date is in this tax year (separation date has been defined by "the date that you both consider the marriage have ended") we should be exempt?

And if that is accurate, am I okay putting down a date of separation for the divorce forms to be just before the transfer of assets? (divorce will be on the basis of unacceptable behavior so that we do not need to wait 1 year)

If anyone can advise pointers on the above as really confused about the dates, and what order things should have happened as anxious may make/have made a costly mistake

Thanks so much in advance

[Deleted User]

There was a similar thread recently where I indicated that, when the legal teams come to divide assets under ancillary relief, NO consideration is given to any potential CGT liabilities leaving both parties to sort out themselves. This is a prime example of that. Obviously this could alter the ‘net’ position of each party. I would not be signing the decree absolute without liabilities clarified.

Others will reply more fully but you should know that it is where you live as a matter of fact that matters, not how many properties you own. Additionally, when I was with HMRC the date of separation was the date ‘you ceased living together as man and wife’, obviously no longer appropriate in these times. However, if you moved out two years ago - is this not the separation date?

Obviously  I cannot comment further but have a read of 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-2019#living-together

jamgar

Thanks for your reply, although I had moved out it was on the basis that time apart may help us reconcile our differences, but it was agreed earlier this year that this was not going to be possible, hence the transfer of assets taking place. So although "seperated", not permanenly seperated until earlier this year

Jeremy535897

In that case, it may be that the rules on separation outlined in HS281 will be favourable to you. Some more guidance here:
https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/capital-gains-tax/capitals-gains-tax

It all depends on when the separation became "likely to be permanent".

[Deleted User]

Jeremy535897 said:

In that case, it may be that the rules on separation outlined in HS281 will be favourable to you. Some more guidance here:
https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/capital-gains-tax/capitals-gains-tax

It all depends on when the separation became "likely to be permanent".

So - given the monies involved (and there may be other assets)  I would suggest that each party engages a tax adviser to clarify and agree a position and, if it becomes the case, determine liabilities before absolute. It will delay matters but could dave much stress and money in the future.

jamgar

Thanks, I believe it will all depend on HS281 as you suggest  and "living together" specifically this point 

You and your spouse or civil partner are treated as living together unless you’re separated:

• under a court order
• by a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed)
• in such circumstances that the separation is likely to be permanent

In each case the marriage or civil partnership must have broken down. If the marriage or civil partnership has not broken down but the 2 of you do not live in the same house, you’re still treated as living together for Capital Gains Tax purposes.

Should we be deemed as seperated prior to the tax year of transfer of assets, CGT wil be triggered. In respect of liabilities what could the worst case look like in terms of  liability for me (I'm a higher rate tax payer)?

On the basis I gave up my share on the family home and gained my wifes share of the second home (with a payment of £115k to her), would one offset the other or would I pay CGT on just what I have gained? i.e the share of the second home

Thanks in advance

Jeremy535897

There is no set off. The mortgage is irrelevant for capital gains tax, although there may have been stamp duty implications. I will assume that there were no improvements that were reflected in the property's value.
The gross gain is £650,000 - £435,000 = £215,000, although there will have been costs of acquisition and disposal, so say £210,000 gain. Half (presumably) is yours, which is £105,000. You lived in it roughly 9 out of 11 years, so 9.75/11 of the gain is exempt (the last 9 months is exempt as it was your main residence in the past). £105,000 x 1.25/11 = £11,932, which, if you made no other gains in the tax year, is within your annual exemption of £12,300. Otherwise the tax rate is 28%.

Your wife's gain will be half (presumably) of £550,000 - £465,000 = £85,000 so her half will be say £40,000 after costs of acquisition and disposal. Again there may be stamp duty issues.

If there is tax to pay, there is an obligation to report and pay the tax due within 30 days of completion (60 days if the transaction was on or after 27 October 2021):
https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax

jamgar

Thanks Jeremy, just to confirm as my brain is a bit frazzled, I initially thought that my gain would be the fact that I have gained 50% of the second home (and lost 50% of the family home)

But it seems that this is incorrect and actually works the reverse of this:

I am paying tax on gains that I dispose (family home)

When looking at figures, I have surfaced more accurate details:

The house was purchased in May 2012
Price paid was £408,000
Valuation at disposal £650,000


So by your calculations above it would look like:

• £650,000 - £408,000 = £242,000 total gain
• £237,000 net gain considerate of acquisition and disposal costs
• £118,500 is my share of the gain

I lived in the property from May 2012 through to November 2019 (7 and a half years)
The last 9 months is exempt as living in it in the past:

• 7 + 0.5 + 0.75 = 8.25 years lived in
• 9.5 = 'years owned'
• 9.5 - 8.25 = 1.25 years not at the property
• £118,500 x 1.25/9.5 =  £15,592 gains

£15,982 minus annual exception of £12,300 = £3,682 taxable amount

£3,682 * 28% = £1,030.96 to pay HMRC 


Other questions:

Is any of the above calcualtion (relief for living there) dependent on seperation dates, or anything or does that calculation stand from just moving out and disposing of the family home?

Second home  although I have 'gained my wifes share of 50% and now therefore have 100% of the property solely in my name on the deeds - as it is not me disposing of this asset I have no CGT liability ?

Does the fact that I paid £115,000 to my wife play any part as part of the transfer?

There was an extension built on the family home in approx 2019 that cost c£50,000, sounds like this may have an affect?

[Deleted User]

A gain is only realised on disposal and, therefore, no CGT arises on second home for you - obviously not the case for your wife. The £115000 is irrelevant.

The extension will affect your base cost as your share, £25000, will eliminate any gain. 

It goes without saying that you both have to agree on the actual DOS for the purposes of the calculations - good luck with arousing the solicitor/counsel interest in that!

jamgar

On further reading im not sure that that calulation for my liability would be right   --- as I moved out of the family home 2 years ago (over the 9 month rule?) then I will have a CGT tax bill on the disposal of the family home in the region of £22,000 !!??

The years lived there etc would not be relevant?

[Deleted User]

jamgar said:

On further reading im not sure that that calulation for my liability would be right   --- as I moved out of the family home 2 years ago (over the 9 month rule?) then I will have a CGT tax bill on the disposal of the family home in the region of £22,000 !!??

The years lived there etc would not be relevant?

You are confused - at least in your interpretation of the 9 month rule. You obtain relief for the proportion of the time you lived in the property as your main residence plus an additional 9 months if it was your main residence at any point. In an extreme example you could have lived in the property for three months but obtain relief for twelve months as a result of this rule.