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Residential property
"Dividing assets can result
in extra taxes and costs"
A divorce in a long standing marriage where the couple have accumulated many types of assets including investment properties, endowment policies, shares or investment bonds
can result in costs and extra taxes that may not have been realised in time, such as capital gains or life policy penalties.
Introduction In
many parts of England & Wales and Scotland the
pension arrangements could easily be the most valuable
asset of a couple on divorce, judicial
separation and nullity of marriage.
In the southeast of England it is usually the case
that the largest asset class will be property, including
the principal residence as well as other investment
property.
Different orders can
be applied to the matrimonial
home by the
court depending on the circumstances of the parties.
The main consideration during ancillary
relief proceedings will be the impact of capital
gains tax (CGT), if any, arising from the disposal
of capital assets. CGT was introduced in the Finance
Act 1965 and the charging legislation was last codified
in the Taxation of Chargeable Gains Act 1992.
For CGT purposes the term disposal will include
any transfer of ownership or capital sum derived
from the sale of an asset. Therefore a sale or gift
either in absolute or by way of a trust or settlement
and any exchange of property will be considered
a disposal for CGT purposes.
Any disposals between spouses does not realise a
chargeable gain on transfer. Only on the eventual
sale of the property will the chargeable gain be
realised and payable by the second spouse if the
property is not exempt. The original acquisition
cost by the first spouse will be used in the calculation
as well as any indexation relief, taper relief including
any taper relief of the second spouse.
Transfers between spouses can be rolled over only
if the spouses are living together during the tax
year. Any disposals between spouses on separation
must occur in the same tax year. If the disposal
is after the tax year of separation but before divorce,
the gain may be taxable.
Principal residence
The most significant CGT exemption for most individuals will
be the principal private residence. However, part of the gain
on this property may be taxable if it has not been the principal
residence for the whole of the period of ownership.
If in addition to the principal private residence the owner
has a second home or a buy-to-let property, then this property
will be subject to CGT on disposal. It is possible for an individual
with two properties or more to make an election regarding the
principal residence. This election must be made within 2 years
of purchasing the additional properties and the decision can
be changed so long as it is within the 2 year period.
For the purposes of CGT on the principle residence, there are
periods of absence from this property that will not be liable
to CGT, and these are as follows:
•
Any period of absence of time before
1 April 1982;
•
A period of absence of up to 1 year
between the property being purchased and the owner officially
taking residence;
•
Any period where the owner
is absent that is job-related and accommodation is provided
elsewhere, as long as the owner intends to return to the
principal residence;
•
Any period of absence where the owner
is working overseas as long as this period is preceded
and followed by residence and no other property was the
principal residence;
•
Periods of absence totaling up to 3
years as long as this period is preceded and followed
by residence and no other property was the principal residence;
•
Any period of absence of up to 4 years
in total where the owner is prevented from residence due
to employment in another part of the UK as long as this
period is preceded and followed by residence and no other
property was the principal residence;
•
Prior to disposal, the last 3 years
of ownership as long as the property has been used as
the principal residence at some time before this period
of absence.
There are situations where the principal residence will be partially
exempt. For example, where part of the house is used exclusively
for business purposes, that part will be subject to CGT on disposal.
This will not apply where part of the principal residence is
used some of the time for part-time work.
Furthermore, where the property has been purchased with the
intention of making a gain, such as buying a house to be renovated
for re-sale and not actually living in the property as a principal
residence, then it will be subject to CGT on disposal.
Investment property
All investment property is subject to CGT on disposal. This
includes property purchased with the intention to re-sell after
it has been renovated, second properties such as holiday homes,
inherited properties and buy-to-let properties.
The gain on disposal can be reduced by deducting from the disposal
proceeds the acquisition costs as well as the associated costs
of acquisition and disposal and any improvements. Furthermore
the owner can applying indexation relief for property before
5 April 1998, taper relief from 6 April 1998 and their CGT exemption
of £7,700 for the 2002 / 2003 tax year.
For example, a holiday cottage was purchased for £80,000
in October 1989 with legal costs of £400 and stamp duty
of £800. The cottage was improved with an extension of
£20,000 in June 1993 and sold in 2001 for £180,000.
The indexation relief for the period June 1993 to April 1998
is 0.38 and for June 1993 to April 1998 is 0.15. The legal costs
on sale are £600 and estate agent fees are £2,250.
Chargeable gain:
Disposal proceeds:
£180,000
Less acquisition costs:
£80,000
Indexation relief on acquisition:
(£80,000 x 0.38)
£30,400
Less legal costs:
£400
Indexation relief on legal
costs:
(£400 x 0.38)
£152
Less stamp duty:
£800
Indexation relief on stamp
duty:
(£800 x 0.38)
£304
Less improvement costs:
£20,000
Indexation relief on
improvement costs:
(£20,000 x 0.15)
£3,000
Less legal costs on sale:
£600
Less estate agent costs:
£2,250
Total costs deducted:
£137,906
Untapered gain:
£42,094
Taper relief:
(3 years plus 1 year bonus)
0.90
Chargeable gain:
(£42,094 x 0.90)
£37,884
The chargeable gain will be added to the owner's taxable income
in order to determine the exact tax payable. Where the property
is jointly owned the gain will be divided between the parties
and the eventual capital gains tax payable will depend on their
individual incomes plus the chargeable gain.
