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bigduckontax
bigduckontax, Accountant
Category: Tax
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As part of our divorce settlement, a legal charge in my favour

Customer Question

As part of our divorce settlement, a legal charge in my favour was put on the family home within 2 years of my moving out, subject to a sale within the following 5 years. Rather than selling, my ex has bought me out, and given me a lump sum in excess of £20k, which I have used to pay off the mortgage on my new house, and intend to invest the balance. Do I need to declare it for tax purposes? Will the money be subject to tax?
Henry
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
Gifts are outside the scope of UK taxation. There is but one danger, they create a Potentially Exempt Transfer (PET) in the donor's Inheritance Tax (IT) position. PETs run off at a taper over seven years. In the event of the donor's decease within this time PETs are added back to their estate for IT purposes and are the first to suffer the Tax. In the event of the deceased's estate being insufficient to meet the tax charge on the PET then it cascades down to the beneficiary for immediate payment. The classic way to protect this is a Decreasing Term Life Insurance. IT does not kick in until an estate exceeds 325K plus charitable and some other bequests.
There may be a loophole, if this buy out was before the decree absolute then legally you were still married and inter spousal gifts are outside the scope of UK tax anyway and the PET positioin would not kick in.
There is nothing for you to declare to HMRC. In the unfortunate event of the donor's decease one of the questions in the IT return is indeed gifts, but that will be not be your concern but that of executors or administrators. Of course, any income derived from balance of the gift must be declared.
I do hope I have put your mind at rest on this matter. You have been given correct advice before anyway.
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Expert:  bigduckontax replied 2 years ago.

Thank you for your support.

On reflection I gave you completely the wrong answer, but the gist was correct and you have nothing to report to HMRC. By buying your share out you have sold your interest in your original residence, but as it was your sole of main domestic residence Private Residence Relief (PRR) would apply at 100% of the gain. Most people do not realise that when they sell their house they are liable to Capital Gains Tax (CGT) on any gain, but for nearly everybody PRR wipes it out. In any event the last 18 months of ownership don't count either and you are deemed to be in residence even if you are not.

So the answer is a lemon; you would appear to have no liability so can retire from the fray unscathed. You can keep the advice on gifts in your data bank for future reference!

Customer: replied 2 years ago.

Many thanks for the clarification, Big Duck. As long as the upshot is I don't have to pay any tax, I'm happy!

Expert:  bigduckontax replied 2 years ago.
I though you might be!
Expert:  bigduckontax replied 2 years ago.

Please be so kind as to rate me before you leave the Just Answer site.

Customer: replied 2 years ago.

er - I thought I did, with an 'Excellent' (see 10.40 post above).

Expert:  bigduckontax replied 2 years ago.
Absolutely correct, you did.
Sincere apologies for asking you again. Made a right mess of this, didn't I. No need to respond with a raspberry though!
Customer: replied 2 years ago.

No intention to do so; I'm very grateful for your advice.

Expert:  bigduckontax replied 2 years ago.
Just a final post to clear my question list.

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