CGT/Advice House owned with sibling with divorce likely

Music_Man_3

Hi, could someone please give me some initial advice, or point me at some relevant websites as to my situation? Should I be visiting a solicitor or an accountant for professional advice?

In 2002 I bought a house with my brother (tenants in common with a 50:50 ownership agreement although I paid £57K and he paid £50K). This was a few years before he got married.

The house was for him to live in with his family (kids and partner but they weren't initially married) and as a long term investment for me. They don't have a prenuptial arrangement or anything like that. I have never lived at the property. They don't pay rent and he is responsible for the up keep of the property. I have my own house which is my primary (and only) residence. I'm also single with no children so couldn't share CGT with a partner by splitting my share. There is no outstanding mortgage on the house that we bought together - as I wanted to ensure there would be no inheritance or debt issues should I die.

My brother and his wife aren't getting on and so might separate and/or get divorced. So if this happens I think the house will be sold and his wife will have a claim on his portion of the house. I think the market value of the house will now be about £190K. So this would mean I would get £95K back... so I can deduct my initial investment of £57K and a tax allowance of about £9K. Meaning CGT liable on about £29K. My understanding was that I would have to pay CGT on the
gain at a rate 90% (because 100% in first 3 years, then 95% for 4th year and 90% for 5th year, etc, which would drop to 60% after 10 years). Is this right or does CGT change in the next financial year? Are there any options available to me to reduce any capital gains or other tax charges?

silvercar

My understanding was that I would have to pay CGT on the
gain at a rate 90% (because 100% in first 3 years, then 95% for 4th year and 90% for 5th year, etc, which would drop to 60% after 10 years).

This is called taper relief. It is being dumped in April.

this right or does CGT change in the next financial year?

Flat rate of 18%, CGT allowance of £9,400.

jimmo

In many ways I fear this is not actually a tax issue in the first instance. Tax may come into it later. The key question for Capital Gains Tax purposes is who are the Beneficial Owners of the house. It is definitely not who are the legal owners.
In looking at Beneficial Ownership Tax law follows general law and in my days as a taxman I had the benefit of being able to rely on solicitors for legal advice. I don’t have that now but obviously you pick up a thing or two on the way.
The considerations on Beneficial Ownership do include how much you invested in the first place but they also take into account who actually lives in the property, who pays the bills and who maintains the property.
In the financial circumstances you describe (without the family difficulties) then if your brother and his wife wanted to move to a new house I would really have little difficulty in accepting that your brother and his wife had a significantly greater Beneficial Ownership in the property than you did. Then most of the Capital Gain on the sale of the first house would be attributable to you brother and his wife, who would be exempt from Capital Gains Tax. So the taxman would lose out.
Turning that around I really fear that if your brother and his wife do split up then her solicitor is going to argue that she and your brother were joint Beneficial Owners of much more than 50% of the property and she is entitled to 50% of their share.
How much you could get out of the deal could be a lot less than what you put in in the first place.
I really suggest you get yourself a solicitor now because if your brother and his wife “take the gloves off“ then you are going to be a serious loser.

Music_Man_3

silvercar and jimmo thank you both for the advice and taking time to post a reply. Also thanks to anyone else who read through etc.

OK so I now understand if they weren't getting a divorce then should the house be sold after April 2008 of this year then I'd be liable for CGT at the rate of 18%. Although because of the beneficial ownership (as in I haven't had the benefit of it) then the CGT I would be liable for could reduce. So this is what is most likely if everyone were friends and there were no disputes. I can look these further up on the Internet now I have an idea what to look for.

Yes I understand what you mean about if things turn nasty. When the house was originally bought then we had a solicitor draw up an agreement - I think this was a declaration of trust for the property. However, this was before his marriage and so the rules might have all changed. I will take your advice and see a solicitor to find out what the current situation is, and whether this is anything I can do to protect my investment - it certainly wouldn't be fair that I could lose money when I helped them out in the first place, I could have put my money in a much better investment but it wasn't and still isn't about making money - it was to help them out as they couldn't have afforded to do it on their own. It does seem a complete shame that I was in a position to help them out yet could lose out. I'll try to get a solicitor who can give me both CGT and how to protect my "investment" advice.

Best regards