You should refer to HS283
as part of this answer. You might also look here
for information on divorce and tax.
If you sell the property for £850,000, you will make a gain of £453,000 (850,000 - £197,000 - £200,000), £226,500 for each of yourself and your wife. Once you deduct the costs of selling (legal fees, stamp duty, survey fees, selling agent fees etc), the gain for each of you will be lower. Only expenditure which improves the home may be claimed as part of the cost of the property. General repair costs cannot be claimed. HMRC may ask for proof of improvement expenditure in the form of receipts and invoices. Photographic evidence may help if you have lost paperwork.
Assuming your wife will have lived in the property for the entire period of ownership by the time it is sold, her share of any gain will be exempt from CGT under the main residence rules.
I would normally divide the gain by the number of months of ownership as opposed to years for a more accurate calculation. As far as your share of the gain is concerned, you will get exemption from CGT for the period you lived in the property (12 years) and for the last 18 months of ownership. That accounts for £138,989 (£226,500 / 22 x 13.5). The balance of your share of the gain of £87,511 will not be tax exempt. The first £11,100 of the taxable gain will be tax free due to the annual CGT exemption leaving you with a net taxable gain of £76,411.
There are two rates of Capital Gains Tax, 18% and 28%. The rate or combination of rates that you will pay will be determined by the level of your income in the tax year the property is sold. One of the following scenarios will apply to you for a 2015/16 disposal:
1 If the sum of your income and the net taxable gain is £42,385 or less in 2015/16, then all the taxable gain will be charged to CGT at 18%.
2 If your income alone is £42,385 or more in 2015/16, then all the taxable gain will be charged to CGT at 28%.
3 If your income alone is less than £42,385 in 2015/16 but greater than £42,385 when the net taxable gain is added, then part of the net taxable gain will be charged to CGT at 18% and part at 28%.
I hope this helps but let me know if you have any further questions.