CGT question on ex-marital home

Hi Sharon,

Please see our reference article on this subject >> https://www.property118.com/capital-gains-tax-relief-on-a-property-you-have-lived-in/

Let’s assume I purchased the property for £100,000 and it’s now worth £200,000, i.e. a £100,000 taxable capital gain if I were to sell the property without ever having lived in it.

Subject to being able to prove it had, at some point, been the Principal Private Residence of my family then we would be entitled to claim PPR relief. This is because PPR relief is available on the sale of a property which has at some time been an only or main residence. 18 months of ownership are exempt in calculating Capital Gains Tax, whether the individual is living there at the time of selling or not.

It is important to note that PPR relief claims are often investigated by HMRC. For this reason it is imperative to be able to prove, beyond any shadow of doubt, that the property was indeed your Principal Private Residence. Examples of how this can be achieved are Council Tax records, bank statements, voters roll, utility bills, doctors and dentists records etc. The more evidence the better of course.

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So, let’s assume my wife and I had owned the property for 10 years and never lived in it. Upon sale we would have made a gain for tax purposes of £100,000. However, if my wife and I could prove that the property is/was our Principal Private Residence, even if it was only for 6 months (there is no stated minimum), we could claim 18 months of PPR relief. On that basis we would only pay Capital Gains Tax on 85% of the gain, i.e 10 years of ownership less 18 months of PPR relief. In other words, our taxable gain would reduce to £85,000, even though the actual gain would have been £100,000.

On top of that we would also be able to claim “Letting Relief” at the same figure or £40,000 whichever is the lower. The good news is that each person can claim letting relief. Therefore, in the example above my wife and I could also claim a further £15,000 each of letting relief, reducing our taxable gain to just £55,000.

Finally, don’t forget that each owner also has a Capital Gains Tax annual exemption allowance which can also be used to reduce the taxable gain. For the 2014/2015 tax year that figure is £11,000 per person. Therefore, using my example above, a £100,000 taxable capital gain could be reduced to £33,000.

This is a VERY good reason to take professional advice!

The cost of the advice could well represent only a fraction of the tax savings ?

If you lived there previously

You do not need to move back into a property which you previously lived in and subsequently rented out in order to benefit from the tax breaks above. The fact that you occupied the property as your Principal Private Residence before you rented it out still counts.

Hmmm looking at it I am not sure it is that clear cut at all.

Hi Sharon

HMRC has a very good calculator online which is free to use - see >>> https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

If you can't get the answer from that I suggest you make contact with Pacific Limited Chartered Accountants - Contact Neil Barlow or Graham Mitchell - Telephone: 01603 630 684 and tell them I referred you please.
.

On your figures, your husband has owned the property for 39 years (1978 to 2017, assuming you sell this year). It was his Principal Private Residence from 1978 to 1990 and from 1990 to 2006, so approx 18 years, though obviously January 1978 to December 2006 makes this nearer 19 years (CGT is calculated on a monthly basis). Has the accountant included all of your husband's CGT allowances? He is entitled to the following:
- an approx £11K CGT allowance in the year of sale
- the last 18 months of ownership are free of CGT
- your husband should be able to deduct any maintenance costs incurred between 2006 and 2017, including eviction and cleaning costs, and perhaps his original purchase and final sale costs too (estate agent fees etc).
- finally, an argument could be made by your accountant to HMRC that the ex-wife was effectively a tenant from 2006-17, even if she paid no rent, so your husband may be entitled to claim up to £40K in Lettings Relief for his period of non-occupancy.

As regards the capital value, is your husband the only named owner of the property and been paying the mortgage, so he will receive its value in full when his ex-wife moves out and he sells up? i.e. is she entitled to any capital sum, either as co-owner or a lump sum granted by the divorce settlement? It could be argued she was effectively a co-owner and beneficiary for the period 1990-2006, so reducing the net value of the property for your husband and hence his CGT liability. She will also be entitled to CGT allowances on her share of the gain. Alternatively HMRC might be persuaded to regard her divorce lump sum as a business cost to be deducted from the property's value when calculating your husband's CGT.

You need specialist advice though. If the ex-wife was effectively the co-owner of the property, then there's a risk she will be entitled to a share of the sale proceeds: it could be argued in her favour that she was a joint tenant for ownership purposes from 1990-2006 (assuming they married in 1990 and divorced in 2006), and that she remained the co-owner from 2006-17: the divorce settlement effectively treated her as a beneficiary by allowing her to continue living in the property. It depends really what the divorce settlement said about how the property's value should be split up, and how this was affected by the ex-wife continuing to benefit from the property by occupying it rent-free while your husband was forced to live elsewhere.

Reply to the comment left by "Tony Atkins" at "28/03/2017 - 12:55":

Hello Tony, thanks for this. Divorce settlement entitles ex to 50% of the proceeds after deduction of costs etc & also deduction of associated expenses (she has OCD, hoards & there is an initial retention of £5k as we shall probably need a skip to clear). She was meant to continue to maintain the property to the same (previously good) standard but this has not a happened (husband has not been inside but we know a relative who saw it about a year ago). One example is that the boiler broke down and was not repaired for 2 years so there could be associated damage, not to mention the damp we know is there.
He converted to an interest-only mortgage 2006 so that will be deducted (c40K) before division. Interest has mainly been paid by DWP (due to her benefit claim) but she was meant to pay c£60 pcm top-up but never has. We have been meeting that for the past 11 years so that will be deducted too.
All of this has been verified by our solicitor recently and ex has acknowledged this arrangement/agreement in writing.
Due to non-maintenance, there will be 2 sets of valuations and an agreement made as Court said, at the time of divorce, that it was not their intention that Paul should suffer any detriment.
On top of all that, she has a Legal Aid bill to settle (which has been accruing interest) that will be deducted from her share...she won't have too much left to play with.
What 'expert' advice do you suggest please-Tax Accountant specialising n Property? How do we gauge a 'good' one in our area (we would probably prefer to meet F2F).
We have explored (including via '118') whether ex was effectively a tenant and whether Paul had any LL liabilities to consider but the consensus was 'no', however he has asked for a copy of her Buildings Insurance each year, to ensure it has been covered.