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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15976
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My wife and I bought (and lived in) Flat A in 200 ,500.

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Hi. My wife and I bought (and lived in) Flat A in 200 for 306,500. In 2004, we bought and moved into HOUSE B, for £1,085,000. We kept Flat A (not really through choice - there was a dispute at the time which meant we couldn't sell it).
Fast forward to 2012. My wife and I separated. I moved back into Flat A, she remained in HOUSE B with the kids. Reconciliation proved impossible and was never on the cards. Happily things are amicable though. We have been finalising the divorce - I was made redundant at the end of 2012 and we decided to wait till I had a job again before sorting the finances out.
We both legally own both properties. We are about to sign the decree absolute. Vanessa will remain in, and keep House B. I need to move. House B is her primary residence. My question is: when I sell Flat A next year - valued at around £1mm - am I/we liable for CGT? In my view it House B is Vanessa's primary residence, and Flat A is (and was) mine.
Hi. Can you tell me in which month in 2000 you bought House A please. Which month in 2004 did you buy House B? Which month in 2012 did you separate? Did you make an election for either of the two properties to be treated as your main home within two years of acquiring the second? Has House A been let at all?
Customer: replied 2 years ago.
House A: May 2000
House B: Mar 2004
Separated in Feb 2012 (when I moved (back) into House A)
No, we made no such election. The intention was always to sell it at some point, but various family members living in it stopped that happening. Lucky really, since it meant I had somewhere to live when things headed South. We did briefly let it out via an agent in 2004/2005 (does that make a difference?)
Letting does make a difference. What was the exact letting period?
Customer: replied 2 years ago.
I'd need to check, but I'm pretty sure May 04 till Mar-06.
Can you confirm that the property interest swap is taking place under a court order or a private agreement and when that will take place exactly please. What is the value of House B? Is any type of equalisation payment part of the arrangement assuming the properties have different values?
Customer: replied 2 years ago.
Both properties are currently jointly owned as owners in common. We are trying to avoid costly court proceedings (and being pitted against each other), as things are amicable, and we are on the same page financially: she keeps House B, I keep House A. At the moment, House A equity (£700k) + cash (£750k) roughly equal House B equity (£1.5mm), so we have decided to move on with no formal financial agreement (I pay the school fees and the assets are divided roughly equally). So no, no equalisation payment. An informal agreement around the division of assets and a working understanding of financial arrangements going forward. But I need to move, as we have 3 kids, and House A only has 2 bedrooms!!!
Customer: replied 2 years ago.
And obviously want to avoid CGT if I can, as the last three years have already done considerable damage to my balance sheet as I haven't been working and have had no income.....
What does the cash payment represent if it isn't an equalisation payment?
Are there any mortgages on the properties?
Customer: replied 2 years ago.
It's just cash sitting in a joint account that we've agreed I can use to buy a property once I'm working again..... so I can see why you ask (it has the effect of roughly splitting the assets in two), but we weren't thinking of it as a transfer of assets as such - more a utilisation. As I said, we've been desperately trying to keep this all informal so as to avoid entrenchment on either side. Yes, both properties have mortgages, for which we are both liable. £1mm on House B (at 0.99% so we don't want to touch it) and £300k on House A (again at a great rate), but that will be paid off when I move.
Leave this with me while I draft my answer. It will takle some time so please bear with me.
Customer: replied 2 years ago.
Of course. Many thanks for your help. I have to go out for a few hours now.... if you respond while I'm gone, will I still be able to reply or clarify things in your response? If you could incorporate two queries in your response, I'd be much obliged: (a) whether we would be better off, from a tax perspective, to sell Flat A BEFORE the decree absolute is signed rather than after (I'm pretty sure definitely NOT, but this is the final hurdle in us finalising things), and (b) the impact of the hypothetical situation where Flat A had never been let out. Is that doable, you think?
You can access your question at any time. When I have posted an answer, you will be notified.
Customer: replied 2 years ago.
To clarify: is there any potential tax benefit to not finalising the divorce now ahead of a potential sale of Flat A at some point next year - that is the real question in all of this. We're about to sign the decree absolute, but Vanessa's lawyers have raised the issue of potential CGT liabilities going forward. My view is that (a) House B will never attract CGT, and (b) HOUSE A might. But the CGT House A might attract is irrespective of whether the divorce is finalised or not, and indeed if we're not divorced, any attempt to suggest it's my primary residence and therefore does not attract CGT would be weakened..... THANKS!!!
I'll try to deal with all your points in my answer.
Customer: replied 2 years ago.
You're a gentleman, thanks.
Hi again.
You should refer the notes at each of the links below when you have read my answer.
Gains on property sales are treated as having accrued evenly over the entire period of ownership. Transactions that occur after the tax year of separation are not covered by the "no gain no loss" rules that married couples enjoy.
The gain you make on any property that has been your main home will be exempt from CGT for the period that you lived in it and for a maximum of the last 18 months of ownership when you didn't.
The proportion of your share of any "gain" you make by disposing of your share of B to your wife (this will be a disposal for CGT purposes for the period from 18 months after February 2012 when you separated until the date of transfer will be chargeable to CGT.
In order to mitigate that, you could make an election under Section 225B for B to be treated as remaining your main home for CGT purposes
until such time as your interest is transferred to your wife. The problem with such an election is that exposes that part of any gain you make from the disposal of A that is covered by the period from February 2012 to the date that your interest in B is transferred to your wife to CGT.
Your wife will be treated as having disposed of her interest in A to you and to the extent that her "gain" is not covered by her occupation of the property and the last 18 months of her ownership interest and letting relief, it will be liable to CGT.
Since you have lived in A longer, you will get exemption from CGT for a larger proportion of the gain when you sell it for the total period of time that you lived in it as your main home unless you make the Section 225B election I referred to above in relation to property B. That proportion of the gain when you were not living in the property will be exposed to CGT but letting relief (See HS283) will mitigate that somewhat.
As you will see from the links I gave you the date of transfer and values attributed to the transfer of interests will depend on when they are done in relation to a court order or the decree absolute. There may be some merit in considering waiting until after the decree absolute as you can read in CG22423 (link above).
You really ought to discuss your options with a solicitor with access to tax knowledge in this area, maybe an accountant or tax adviser he or she does business with as the calculations can be complex.
I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.
Many thanks for this. Is the bot***** *****ne that each of us disposes our share of the properties to the other ASAP, and then each of us is liable for CGT on the gains on the other's property made between Aug-13 and that date of the decree absolute?
Not quite.
You were absent from A from March 2004 to February 2012. That gap is a taxable period. The period from May 2002 is a tax free period as is the period from February 2012 to date (but see below). The last 18 months of your ownership of A will be a tax free period.
You have been absent from B from February 2012 to date. The period from March 2004 to February 2012 is a tax free period. You will get the last 18 months of your ownership of B as a tax free period and possibly all of the period from February 2012 to the end of your ownership interest if you make the Section 22B TCGA election but you will expose the same period of your ownership of A to CGT if you do.
Your wife has been absent from A from March 2004 to date. All of that is a taxable period apart from the last 18 months of her ownership interest in it.
Assuming she lives in B for the whole period of her ownership of it, any gain will be tax free.
Customer: replied 2 years ago.
Ok great (well, not great, but you know what I mean!). Many thanks for your help. And there was I thinking we now effectively have 2 separate primary residences.... one happy consequence of an otherwise regrettable situation. I will rate you as soon as I'm home, but you've been great, thanks.
Thanks and good luck.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Last thing: very sorry. Would it make a material difference had FLAT A been rented out for the entirety of our joint absence (i.e. from when we moved out in 2004 till I moved back in in 2012)?
Yes. You would get more letting relief. Look at Example 9 in HS283.
Customer: replied 2 years ago.
Will do - thanks.