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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15847
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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If a couple divorce and the wife keeps the main home and the

Resolved Question:

If a couple divorce and the wife keeps the main home and the husband keeps the rental property is there any capital gains tax if he should sell the house?
Submitted: 9 months ago.
Category: Tax
Expert:  TonyTax replied 9 months ago.

Hi.

Are you referring to the rental property?

Customer: replied 9 months ago.
the property is currently rented out.
if the husband has the property transferred into his name and wants to sell it does he have to live in that property for a certain period to avoid capital gains tax?
Expert:  TonyTax replied 9 months ago.

How long have you owned it? Was it in joint names until you separated or divorced?

Customer: replied 9 months ago.
We are going through divorce and trying to reach financial settlement. Rental property is in joint names. Both properties are of equal value so we are trying to work out if it is fair for wife to have main home and for me to have the rental property, but it depends on whether capital gains tax would have to be paid when rental property sold. We have owned it for 10 years.
Expert:  TonyTax replied 9 months ago.

Are you still living together?

Customer: replied 9 months ago.
Expert:  TonyTax replied 9 months ago.

If a married couple swap assets before the end of the tax year in which they separate, the transactions are treated as being done on a no gain, no loss basis. That is not the case if the transfers occur after the end of the tax year of separation. Take a look at HS281 here for more information. You can be effectively separated even if you still co-habit.

The cost of the rental property for CGT purposes will be the sum of 50% of the original purchase price and 50% of the value when the other 50% was transferred to you. However, if the property was transferred to you in the tax year of separation, you use the whole of the original purchase price as your cost for CGT purposes as you simply take your spouse's share of the cost as your own.

Take a look at HS283 here. See example 9 which is a property which has been the main home and let. You cannot simply move into a property for a few months and wipe away a potential CGT liability. Whether you have one or not depends on the amount of the gain made on sale, whether the property was ever your main home and, if so, for how long and whether it was let and if so, for how long. That part of any gain covered by the period of occupation as a main home will be exempt from CGT as will the gain for the last 18 months of ownership where it has been your main home. If it has been your main home, you will also get letting relief which will be worth up to £40,000 of the taxable gain. Example 9 sets this out quite well. As you have owned the property for 10 years, you wouild need to live in it for a long time to avoid CGT completely unless it hasn't increased in value much since you bought it.

I hope this helps but let me know if you have any further questions.

Expert:  TonyTax replied 9 months ago.

I have to go out for a while but will be back in about 30 minutes.

Customer: replied 9 months ago.
ok I will be offline then. I will read through what you have said and if I have any more questions will come back to you.
Thanks.
Expert:  TonyTax replied 9 months ago.

OK.

Customer: replied 9 months ago.
Hi Tony
So as I understand from your examples and explanations I would be liable for CGT if I agreed to the transfer of the rental property in my name. In which case an allowance would need to be made to compensate me for this in the divorce settlement. Presumably my wife would have to pay CGT too on her 50% of the asset?
Customer: replied 9 months ago.
Sorry, my misunderstanding. I would be liable for CGT and not my wife.
Expert:  TonyTax replied 9 months ago.

If your wife transfers her share of the rental property to you before the end of the tax year in which you separate, it will be a no gain, no loss situation, so no CGT for your wife. If you sold the property immediately, you would have CGT to pay if the property has risen in value in the time you have owned it.

Customer: replied 9 months ago.
I think what you have said clarifies the situation. Thanks for your help. Might be as well to sell the rental property and each pay our own capital gains tax.
Expert:  TonyTax replied 9 months ago.

Are one or both of you basic rate taxpayers? How much would the gain be?

Customer: replied 9 months ago.
both basic rate tax payers. Not worked out the actual figures yet.
Customer: replied 9 months ago.
The gain would be in the region of £190,000
Expert:  TonyTax replied 9 months ago.

The both of you will have part of the gain at least taxed at 18% and part at 28%. The first £11,100 of your respective shares of the gain will be tax free.

Assuming your both have incomes in excess of the personal allowance of £11,000, a maximum of £32,000 of what's left will be taxed at 20%. For every £1 of income you have in excess of £11,000, that will reduce the amount of the gain taxable at 18% (£32,000 - £X) with any balance of the gain being taxed at 28%.

Customer: replied 9 months ago.
We took £80,000 equity out of the rental property two years ago and invested this in our main home. So this means that when the rental property is sold the amount received will be £160,000
Customer: replied 9 months ago.
It just seems a complicated calculation to me. The capital gain will be more than the amount received when sold
Expert:  TonyTax replied 9 months ago.

Borrowings are not taken into account when calculating a gain or a loss. Take what you sell the property for and deduct what you bought it for. If you improved the property, you can claim a deduction for the cost of those improvements (not standard maintenance costs). You can also claim a deduction for legal costs, survey costs, stamp duty, selling agent fees etc

Customer: replied 9 months ago.
But even so it is not a good deal for me to have this rental property transferred into my name. With your help and advice I am now able to make the right decision for me.
Customer: replied 9 months ago.
Thanks so much for your help.
Expert:  TonyTax replied 9 months ago.

Thanks.

Would you mind rating my answer before you leave the site.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15847
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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