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bigduckontax, Accountant
Category: Tax
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Split of house capital after a break up

Customer Question

Hi Question in two parts really. Myself and a partner (not married) decided to buy a house together so put both of ours on the market, mine sold quickly. We bought a house (joint mortgage) with my capital (about £65k total - deposit plus building fund). We rented hers out. When we split she moved back into hers and and I am still in the joint owned, which is for sale. We are still pretty civil and I have no reason to believe she will try and take half my capital but I have to plan for the worst scenario. So the question is: 1. Since this was essentially her second house, would she be liable to gains tax on any profit, and if so how much (she is a 40% bracket earner)? 2. I am only paying interest on the place since we split. She has not paid the mortgage on this at all for a year now. Does that fact put me in any better position? Thanks Paul

Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello Paul, I'm Keith and happy to help you with your question.
Firstly, forget about mortgages and the interest thereon. These do not come into the Capital Gains Tax (CGT) computations. The relevant interest is however allowable against the rentals to reduce the level of income for Income Tax purposes.
Your partner had a house and then bought another with you. I assume that she did not advise HMRC within two years of the second acquisition which property she designated as her sole or main domestic residence. In the absence of any such election HMRC will determine to which residence the Private Residence Relief (PRR) will be applied from the facts. In view if the fact that she lived in the first house, you lived together and then she re-occupied , the majority of occupying time in her house exceeding the joint occupation time I submit that HMRC would allocate her PRR to her old house.
Thus the joint house, as far as it concerns her will, as you surmise, be a second home and any gain made on the sale be liable to CGT. The gain is calculated by taking the purchase price plus costs plus any improvements eg new kitchen, double glazing etc. This gives an acquisition price. Then the selling price less costs of sale gives the sale price for CGT and the difference between the two the gain, divided by two of course as it was a joint tenancy. This gain is taxed at 18% or 28% or a combination of the two rates depending on the income level plus the gain in the year of sale. As she is a 40% tax payer it is pretty clear that the 28% rate will rule and for a say 100K gain the CGT would be 28K.
I do hope I have shed some light on your once partner's CGT position for you.
Customer: replied 2 years ago.

Hi Keith, nice me "meet" you

You are right,, she would not have informed HMRC of PRR

One thing concerns me. I had £62k-ish from the sale of mine. £37.5k was the deposit, the rest went into doing the place up (no new kitchens etc but things like underfloor heating, tiling, etc etc), all difficult to pin down to actuals

Could you just clarify this sentence for me please:

"This gain is taxed at 18% or 28% or a combination of the two rates depending on the income level plus the gain in the year of sale"

Regards

Paul

Expert:  bigduckontax replied 2 years ago.
Right, Paul. CGT is applied at 18% for the proportion of the gain which is available after IT has been paid at 20% The balance would suffer tax at 28%. However this is academic for we know that the partner is in the 40% tax bracket, thus she will have used up all the GBP 31865 20% IT bracket and thus be hammered at 28%.
I have some difficulty in seeing your problem. Your 50% ownership attracts PRR for you and that reduces any gain made by you by 100% for CGT purposes. The matter would be different had you married, but that event did not occur.
Please be so kind as to rate me before you leave the Just Answer site.
Customer: replied 2 years ago.

Okay got that bit!

One last thing, we bought the house for £177k, £37k of which was the deposit that I paid, and spent around £33k of my money doing it up, £210k total.

If we sold for £250k then would, in the eyes of the taxman, the gain be £40k, or £73k (diff between 177 and 250). I'm trying to work out whether, if she were a b******* and try to take half my capital, she would be taxed on ALL her gain, house profit plus my half of the capital?

Regards

Paul

Expert:  bigduckontax replied 2 years ago.
Firstly, Paul forget all about deposits, thinking about them only muddies the water.
Acquisition price is 177K + 33K = 210K.
Sale was 250K [don't forget the costs of sale and deduct same] so gain is 250K - 210K = 40K as you surmise, that is 20K each and you both have an an Annual Exempt Allowance of 11K to offset the gain. Worst case scenario is 2.52K tax due on her share.
I wouldn't worry about your share of the sale proceeds. As the house was a joint tenancy then you must receive half the net proceeds. Were she to take your half also then that is a simple matter. It is theft and a reference to the police appropriate.
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Customer: replied 2 years ago.

I'll put it this way, and maybe given your expertise is tax, I'm asking the wrong person:

Current mortgage is £140k, giving £110k clear if we sold for £250k

By rights, as in if all was fair, £70k of that £110k is mine (deposit and spend on renovation), and we split the remaining £40k

Seems that if she did try to take half of the £110k, she would only be subject to CGT on £20k?

Expert:  bigduckontax replied 2 years ago.

This house was held as a joint tenancy and therefore is deemed to be a 50/50 ownership unless the deeds say to the contrary. Thus the gain which we know to be 40K will be split half each as I explained before for CGT purposes. How you divide the sale proceeds is a matter upon which you must mutually agree. Taking the whole sum the receipt is 250K. From that deduct the deposit and the renovation cost. The balance should the be divided 50/50 and each will receive their appropriate proportion of the sale price, she will get 90K and you 90K + 70K = 160K, total distribution 160K + 90K = 250K. That, in my opinion, is the logical and equitable solution. However, without full data as to who paid what so I can build up a joint venture account I cannot give a definite opinion.

Expert:  bigduckontax replied 2 years ago.
Thank you for your excellent support.

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