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Capital Gains Tax on Compensatory Payment

Paying towards another party CGT liability - will it increase the taxable gain

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Three brothers are about to sell a jointly owned residential property investment for £1.5m.

There is an agreement between them that if one of the joint owners wants to sell against the wishes of the others, the Capital Gains Tax due will be shared equally.

Only 1 brother wants to sell. His 1/3rd share was recently inherited at probate value and there will be no Capital Gains Tax due on this part.

The other two brothers have owned their share of the property pre 1982 and their Capital Gains Tax payable will be about £135K each.

Therefore under the agreement the selling brother will compensate the unwilling two brothers by paying them £45K each from the proceeds of the sale.

The lawyer believes that the compensation payment has no tax consequences. I am not so sure as it seems that there could be an argument that the 2 brothers are now receiving a higher price on the sale and therefore have a larger gain with more Capital Gains Tax to pay.

 

Any views on this would be much appreciated.

 

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By David Ex
24th Mar 2022 18:32

Nepweno wrote:

I am not so sure as it seems that there could be an argument that the 2 brothers are now receiving a higher price on the sale and therefore have a larger gain with more Capital Gains Tax to pay.

 

I agree although someone may have a better technical insight.

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By Jane Wanless
25th Mar 2022 10:27

Is the agreement between the brothers not a private, family arrangement. It probably wouldn't be made if the sellers were unrelated.
I'd be asking the solicitor for his argument for the arrangement having no tax consequences, and then having sought appropriate advice, submit following the legal advice.

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Replying to janewanless:
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By Tax Dragon
27th Mar 2022 06:56

Is there a "private family arrangement relief" that I don't know about?

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By More unearned luck
25th Mar 2022 11:33

Is the agreement in writing? If so, how is it worded?

Subject to what the agreement actually says is I'm with the lawyer and against you and David Ex.

The property is held TIC, otherwise the one brother could not have inherited.

As A, B & C each on a third of the property then they are are entitled to precisely a third of the proceeds of sale. For the ratio to other than to be equal the declaration of trust would need to state the non equal ratio and since, on your view, the ratio of ownership changes on a whim it seems very unlikely that the DoT makes any such provision.

I add on your the view computations become a nightmare. The unwilling brothers share of the proceeds increases by £45k. This increases their tax lability, so they are now due greater compensation, this increases their tax liability and so on ad infinitum.

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Replying to More unearned luck:
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By NotAnAccountant2
27th Mar 2022 08:44

More unearned luck wrote:

I add on your the view computations become a nightmare. The unwilling brothers share of the proceeds increases by £45k. This increases their tax lability, so they are now due greater compensation, this increases their tax liability and so on ad infinitum.

The sum of this infinite series is 45k/.72 (assuming 28% tax rate). It's no different to making good a BIK to an employee where you pay them the tax, then 20% of the tax, then 20% of the tax on the tax...

I make no comment on whether the calculation is needed in this case, merely how to do it if it is required.

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By Tax Dragon
27th Mar 2022 07:06

I agree with MUL that the agreement doesn't change the CGT on the land. (Btw, I'm surprised the MV of a one-third share turned out to be one-third of the MV of the whole; there'd normally be some discounting effect. But it's not relevant to your question.)

CGT applies to assets. Question for me is whether the agreement between the brothers creates a chargeable asset (chose in action).

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