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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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I am undergoing divorce proceedings. My wife wishes to

Customer Question

Hi, I am undergoing divorce proceedings. My wife wishes to retain the former matrimonial home which is in both our names and is valued at £382,250 after subtracting selling costs. I have lived away from this house for two years, my wife still lives there. We also jointly own some land valued at £127,000 after selling costs, my wife wishes to retain this too. I am a higher rate tax payer, my wife is a non tax payer. If my half of each of these properties is transferred to my wife as part of the divorce settlement, will I have to pay any capital gains tax on the transfers?
Submitted: 6 months ago.
Category: Tax
Expert:  bigduckontax replied 6 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

For the gain made on the land Capital Gains Tax (CGT) will certainly apply. Is the matrimonial home your sole or main domestic residence ie is it your only home?

Customer: replied 6 months ago.
It's the only house I own (jointly with wife) but I've not lived in it for two years, I'm living in rented accommodation until my divorce is completed.
How much will the CGT charge be for each property?
Expert:  bigduckontax replied 6 months ago.

You have an Annual Exempt Amount (AEA) of 11.3K to offset any gains. The gain on the land land will charged at 10% or 20% depending on the individuals' income including the gain in the tax year of sale. I cannot hazard a guess at this you have not disclosed the acquisition cost. As the matrimonial home is your sole or main domestic residence Private Residence Relief (PRR) will apply and that relieves CGT at 100%. PRR is given automatically.

Customer: replied 6 months ago.
The land (includes a barn) was purchased for £33,000 in 2002 but has had another £28,000 spent on it to convert it to an equestrian premises, so about £61,000 in total. It was valued in March 2015 at £130,000 and recently valued again at the same price. I have not used any of my CGT allowance. The house was also valued in March 2015 at £400,000 but was only £390,000 when recently valued. I read on the HMRC website that gifts to a spouse do attract CGT if we are separated and don't live together in this tax year, which is true, so does PRR apply? Does CGT apply to the difference between value now and acquisition cost or the difference between value now and value when we separated?
Expert:  bigduckontax replied 6 months ago.

Your gain on the land is 130K - 61K = 69K / 2 = 34.5K. Knock off the 11.3 AEA leaves 23.2K exposed to CGT at 20% = 4.64K tax due.

As the house is the only house you own Private Residence Relief (PRR) applies which relieves CGT at 100% when you dispose of your share.

Customer: replied 6 months ago.
As the house has devalued between the valuations can I use the loss on the house to offset the gain on the land/barn?
Expert:  bigduckontax replied 6 months ago.

If you make a capital loss on the house then you can use that loss to offset gains elsewhere or carry it forward.

Customer: replied 6 months ago.
Found this on a website 'From the end of the year of separation until the decree absolute, the former spouses or civil partners are still regarded as connected persons for CGT purposes, and therefore all transfers between them will be treated for tax as if made at full market value, even if no consideration changes hands.'
Don't really understand it but it does seem to be a partial alleviation from the normal CGT rules, can I use it in my case?
Expert:  bigduckontax replied 6 months ago.

No, because we are talking about the land which will always be subject to CGT irrespective of the marital status. However, the disposal price might reduce thus reducing the tax payable.

Customer: replied 6 months ago.
Tell me more about how the disposal price might reduce
Expert:  bigduckontax replied 6 months ago.

If the disposal price falls the gain is reduced also. Thus the tax burden is eased.

Customer: replied 5 months ago.
Going back to the statement I found on the HMRC website (question 13/06/2017 08:13), would that apply to a cash transfer from my wife to me as part of the divorce settlement? She needs to sell shares to raise enough cash, most of her shares are in an ISA so I suspect that she would have no CGT on them but some are not in ISA so I suspect that the gain on those would be subject to CGT.
Expert:  bigduckontax replied 5 months ago.

Yes, but remember she has an AEA also.

Customer: replied 5 months ago.
You said that I would not have any CGT to pay on the transfer of my share of the house to my wife due to PRR at 100% but I found this on a website 'You are entitled to the benefit of private residence exemption for the period that you have occupied the family home as your only or main residence. For this purpose you are deemed to have occupied it for the last 3 years of ownership irrespective of where you have lived.  If you have only lived in the property part of the time then the relief is reduced proportionately.
Expert:  bigduckontax replied 5 months ago.

Actually the extension period was reduced from three years to 18 months some years ago.

This interpretation of the law is incorrect. Whilst it remains the only house you own the PRR applies irrespective of occupation. The wording is 'sole or main domestic residence' although HMRC tend to interpret this as 'sole and main domestic residence.' This is incorrect and their interpretation has been defeated endlessly over nearly half a century.

Customer: replied 5 months ago.
Hi, thanks for advice so far. I am seeing an accountant tomorrow for some advice so might like to check some things with you after that.
Expert:  bigduckontax replied 5 months ago.

Delighted.

bigduckontax and 2 other Tax Specialists are ready to help you
Expert:  bigduckontax replied 5 months ago.

Thank you for your support.

Customer: replied 5 months ago.
Hi, sorry about the delay in replying. I have now seen a local accountant as I needed a written full assessment of my CGT liability for court proceedings. It was all as expected apart from the house as the accountant said that CGT would be due on the transfer. After what you have said I'm happy that this won't be the case and in fact the house transfer will help me offset gains elsewhere as the value of the house has reduced since I became separated. So if HMRC challenge my tax return on this, is there anything I can say to counter their interpretation? Also, am I right in thinking that I can use depreciation of the house value between separation and transfer to offset gains?
Expert:  bigduckontax replied 5 months ago.

I should be interested to hear why your accountant says that CGT will be due when it is your sole or main domestic residence! There is no worry regarding refuting HMRC's interpretation of CGT law. That Department has lost repeatedly over the years whenever challenged. The gain does not have to be declared at all. a note to the effect that the sole or main domestic residence has been disposed of will suffice.

Customer: replied 5 months ago.
I did not challenge my accountant on that point as this interpretation on paper suits me right now. But I would like to use the loss (since purchase I have made a large gain but since separation a loss) on the house since separation to offset some of my gain. It would only be about £5000 loss but that's still £1000 less CGT to pay. Can I claim this?
Expert:  bigduckontax replied 5 months ago.

No, with PRR the net gain is outside the scope of CGT.

Customer: replied 5 months ago.
OK, shame that! It appears then that the HMRC interpretation would actually be better for me as I could claim a £5000 loss on the house transfer. Maybe I should use the HMRC (and my accountants) interpretation for my tax return? presumably the worst that can happen is that HMRC challenge it and I have to pay the extra £1000.
Expert:  bigduckontax replied 5 months ago.

No, because the gain would be calculated from the original acquisition price nd thus be a gain rather than a loss.

Customer: replied 5 months ago.
OK, won't try that then! Think I'm out of questions now but I'll have a think over the next couple of days if that's OK
Expert:  bigduckontax replied 5 months ago.

No problem.