Share this content
33

CGT and divorce

TCGA 92 225B Disposals in connection with divorce, and the arrival of wife no 2

Didn't find your answer?

my client separated from wife no 1 some years ago, she remained in the marital home with the children, they divorced and now a few years later, she has finally bought him out.  Looking at s225B, I was merrily ticking all of the boxes  and thinking that there was no cgt libaility on this transaction as it looked as if all of the conditions were met (although accepting that there would then be a cgt liability on his current home when that was sold) until we factored in wife no 2...

Wife no 2 already owned a house when my client met her.  This was transferred into joint names prior to the second marriage.

Of course a married couple can only have one main residence, so this presumably means that, even though wife no 2 had no financial interest in marital home no 1 and never lived there, if it is his PPR under s225B, then from the date of the second marriage until date of transfer, it will also be wife no 2's PPR for CGT purposes.

Or does this mean that a s225B claim would fail for my client?  Because clearly the first house never was wife no 2's main residence.

Would welcome if anyone has any experience or views on this point in practice, thanks.

Replies (33)

Please login or register to join the discussion.

Scooby
By gainsborough
08th Jul 2020 15:35

Sorry Snickers - no experience of this type of scenario but to get the ball/comments rolling and thinking out loud, would agree with your statement that former residence cannot be PPR of wife number 2 as she never lived there.

My instinct would be for PPR to cover actual occupation of home 1 plus last 9 months of ownership, with main residence for home number 2 kicking in upon second marriage.

(Just in case, have you crunched any numbers re potential loss of PPR on home 2? May result in divorce 2 if second wife loses relief on somewhere that has always been her home!)

Thanks (1)
Replying to gainsborough:
avatar
By snickersinatwix
08th Jul 2020 15:29

i think if we can't claim under s225B, PPR on property 1 will cease when he moved out - which was a few years before marriage. Plus last 9 months of course. This gain is of course a fair amount bigger than the gain (plus wife 2's gain) on current property.

Of course wife 2 won't be claiming PPR on house no 1 if we do claim S225b, but will just be prevented from claiming PPR on her own house from date of marriage to date of transfer of the other house....

Thanks (0)
Replying to snickersinatwix:
Scooby
By gainsborough
08th Jul 2020 15:37

Grrrr....annoyed with myself....thanks for the 9 months correction...force of habit typing 18 months (have corrected my post also).

Yes...your second statement is what I meant.

Thanks (1)
Replying to snickersinatwix:
avatar
By NicoleM
08th Jul 2020 18:58

'Of course wife 2 won't be claiming PPR on house no 1 if we do claim S225b, but will just be prevented from claiming PPR on her own house from date of marriage to date of transfer of the other house'

I don't think the above is correct. I believe wife#2 can claim her share of PPR on her own house during this period.

Thanks (0)
By SteveHa
08th Jul 2020 15:46

Surely, in the circumstances you describe, S225B(2) fails.

But don't listen to me, I'm unqualified.

Thanks (1)
Replying to SteveHa:
avatar
By snickersinatwix
08th Jul 2020 16:10

if we ignore wife 2, we can tick all of the boxes for s225B. But when you consider wife 2 life becomes complicated, which is really the whole point of my question :)

Thanks (0)
Replying to snickersinatwix:
avatar
By Tax Dragon
08th Jul 2020 16:25

"Pursuant to", not "subsequent to".

Thanks (0)
Replying to Tax Dragon:
avatar
By snickersinatwix
09th Jul 2020 09:53

"Pursuant to" - I am not following your point. looking at the definition of "pursuant to" in various dictionaries and thesauruses on line I am getting

"According to a prescribed method or some authority. To follow after or follow out; to execute or carry out by reason of something."

and

"adjective
proceeding after; following (usually followed by to): Pursuant to his studies he took a job in an office."

So taking these two and looking at the statute again, it says "the disposal ...is pursuant to... an agreement between the individual and his spouse" - this disposal was following the agreement with his spouse, so not sure I understand why this means S225B would not apply?

Thanks (0)
Replying to snickersinatwix:
By SteveHa
09th Jul 2020 11:21

You missed, "made in contemplation of or otherwise in connection with the dissolution or annulment of the marriage or civil partnership, their judicial separation or the making of a separation order in respect of them".

This disposal was not made in anyway pursuant to the breakdown of the marriage, but was made incidental to it.

Thanks (0)
Replying to SteveHa:
avatar
By snickersinatwix
09th Jul 2020 12:45

I take that to mean that the agreement between H&W was made in contemplation of their separation/divorce etc, not the disposal of the property. There is no punctuation in the sentence "an agreement between the individual and his spouse or civil partner made in contemplation of or otherwise in connection...." so the "in contemplation of" bit goes with the making of the agreement, not the disposal of the property.

So the disposal is pursuant to the agreement which was in turn made in contemplation of the divorce. The next para allows s225B to apply where there is an order of the court in the actual divorce itself, so by my reading, para a allows s225B under an informal agreement and para b allows it where there is a formal order in the divorce. It seems odd that para a would stop if the divorce had not happened by the time the divorce happens when para b allows that scenario?

Thanks (0)
Replying to snickersinatwix:
By SteveHa
09th Jul 2020 12:58

Well unless you've missed something out of your OP, this agreement is a recent development, unrelated at this time to the marital breakdown, and so can't possibly be included in S225B.

Thanks (0)
Replying to SteveHa:
avatar
By snickersinatwix
09th Jul 2020 13:04

OK, it was agreed at the time of the separation that the wife could remain in the former marital home. several years later (now) she has bought him out. Apologies if this was not clear?

Thanks (0)
Replying to snickersinatwix:
By SteveHa
09th Jul 2020 13:09

Which brings us back to my original thoughts. The disposal to her now was never a part of any agreement, and so fails S225B.

Thanks (0)
Replying to SteveHa:
avatar
By snickersinatwix
09th Jul 2020 14:07

and if it was agreed that she would buy him out eventually at the time of the separation/divorce but they took a while to get around to it, then we are still ok.

Thanks (0)
Replying to snickersinatwix:
By SteveHa
10th Jul 2020 08:17

I dare say any such agreement would need to be clearer than that to survive a challenge by HMRC, and if you are considering engineering the agreement retrospectively, then no.

Thanks (0)
Replying to SteveHa:
avatar
By snickersinatwix
10th Jul 2020 08:45

I am not in the habit of engineering things thanks.

There was a genuine agreement that she would buy him out when she could afford it. It has taken a while, but I see no time limit in s225B.

Thanks (0)
Replying to snickersinatwix:
By SteveHa
10th Jul 2020 11:57

snickersinatwix wrote:

I am not in the habit of engineering things thanks.

I didn't intend to cast aspersions, but to rather fend off what is quite a common theme by other posters. I didn't mean to suggest that you would.

With regards to the rest, I'll let you digest TD's reply below.

Thanks (0)
Replying to SteveHa:
avatar
By Tax Dragon
10th Jul 2020 12:22

SteveHa wrote:

With regards to the rest, I'll let you digest TD's reply below.

Rereading, I've enjoyed my double "bought him ought" typo :¬D. My fingers were clearly in full flow. If only my brain could keep up!

Thanks (0)
Replying to Tax Dragon:
By SteveHa
10th Jul 2020 12:39

I did notice, and whilst many who know me will confirm my pedantry nature, I will rarely call such a thing out on a professional forum unless you upset me ;)

Thanks (0)
Replying to SteveHa:
avatar
By Tax Dragon
10th Jul 2020 14:07

SteveHa wrote:

...whilst many who know me will confirm my pedantry nature...

Shouldn't that be "pedantic"? :-P

(But, if you really wanted to be pedantic, you could have picked me up on "principal". Not my fingers' finest moment.)

Thanks (1)
avatar
By jonharris999
08th Jul 2020 17:07

Oh I see.

Thanks (0)
avatar
By NicoleM
08th Jul 2020 20:06

This is the advice I received from Tax consultants. I have copied & pasted relevant bits. Hope this helps; -

The only period of *husband* which would not receive PRR will be the
period between *moving out date*, and the final nine months of ownership. Any capital gain attributable to this time period which exceeds the Capital Gains Tax (CGT) annual exemption, would be subject to CGT at either 18% or 28%.

However, in circumstances where the matrimonial home is being transferred between spouses on divorce, HMRC will continue to treat the departing spouse as having had the matrimonial home as their main residence provided that:
a) It continues to be the residing spouse’s only or main residence,
b) The home is transferred to the other spouse as part of a financial settlement,
c) The spouse or civil partner who left the property has not made a PRR election in respect of a new property.

As the House continues to be *wife#1* main residence, and we understand that *husband* has not made a PRR election for another property, *husband*would still be able to claim full PRR relief on the transfer of his share of the House to wife, provided the transfer is under the formal divorce agreement. In order to claim full PRR on the transfer, *husband* would need to make an election on his Self Assessment tax return under TCGA 1992 225b.

If the transfer is not made as part of the formal divorce agreement, or *husband* does not make the required election, *husband* would not receive full PRR and husband’s portion of the capital gain which did not qualify for PRR would be taxable.

Thanks (0)
Replying to NicoleM:
By SteveHa
08th Jul 2020 21:19

Your tax consultant has described S.225B, and your final sentence is reference to 225B(2) which says (so far as it applies here):

"(2)Condition A is that the disposal mentioned in subsection (1)(b) is pursuant to—
(a)an agreement between the individual and his spouse or civil partner made in contemplation of or otherwise in connection with the dissolution or annulment of the marriage or civil partnership, their judicial separation or the making of a separation order in respect of them, or their separation in other circumstances such that the separation is likely to be permanent, or"

In the circumstances of the OP, as Tax Dragon highlighted (and which I should have in my first reply), the disposal must be "pursuant to". Since these are events several years after the divorce (per the OP) they cannot be "pursuant to", and so fail the test, in which case, S225B fails in its entirety.

Thanks (0)
Replying to SteveHa:
avatar
By NicoleM
08th Jul 2020 21:31

quite possibly. In my scenario we are applying s225b before finalising divorce...

Thanks (0)
avatar
By Tax Dragon
10th Jul 2020 11:42

Ha! These notifications keep coming through and bringing me back. What a fun thread, I'm sure Steve meant no disrespect with his comment.

My previous comment was brief. This one's a bit longer.

David Brookes FCA, tax partner at BDO, interprets the requirement as [I'm quoting from croner-i]: "The transfer (not sale) is from one spouse to the other and is part of a financial settlement..." [The bracketed bit is part of the quote.]

The advice NicoleM's soon-to-be-ex husband received from a large firm agrees: "However, in circumstances where the matrimonial home is being transferred between spouses on divorce..." [This time I have added the emphasis.]

Now I am not averse to independence of thought and disagreeing with the established view. In fact I love it. But be aware that your view does seem to be at odds with all received wisdom. (FWIW, my reading of your client's circumstance would be that any financial agreement between them vis-à-vis the home was that it would continue to be owned jointly until it was sold or she bought him ought. The transfer to her is pursuant to her buying him ought, not to your supposed earlier agreement. So, sorry, but boringly I am with the masses on this.)

But let's suppose, for argument's sake, that you are right. Where does it take us? Well, let's deal with NicoleM's other comment:

NicoleM wrote:

'Of course wife 2 won't be claiming PPR on house no 1 if we do claim S225b, but will just be prevented from claiming PPR on her own house from date of marriage to date of transfer of the other house'

I don't think the above is correct. I believe wife#2 can claim her share of PPR on her own house during this period.

You don't need me to tell you that is wrong. S222(6) states that there can only be one residence or main residence for both husband and wife. It also says that an OMR election must be given by both - because you can't have one spouse unilaterally screwing[***] up the other spouse's tax.

I think this principal would apply in the fantasy world we have created whereby s225B is in point on a sale years after a divorce. H cannot screw up W2's tax, so cannot make that claim unilaterally. W2 is not competent to elect under s225B herself, not having been a party to the previous marriage. So an election would seem not to be possible, even if it otherwise would have been.

Thanks (0)
Replying to Tax Dragon:
avatar
By NicoleM
11th Jul 2020 20:26

Right that comment of mine was clearly wrong. Oops. I believe S225b will work in my case as it is part of a settlement agreement, before the divorce finalises. I do not believe you can use is in this case, as it is after the event.

Thanks (0)
Replying to NicoleM:
avatar
By Tax Dragon
12th Jul 2020 10:20

If it works, this link https://www.cronertaxwise.com/community/tqotw-divorce-property/ may provide some succour. To you and, indeed, to snickers.

However it highlights another issue that we've not touched on. Even if s225B is in point (I don't like the language about whether the claim "works", BTW - of course it works, if it's applicable). That is that you can have only one OMR at a time. The husband in the OP already has another OMR. (Remember that the effect of the election is simply to treat the old home as a continuing residence for the purpose of applying Ss222-4.)

Thanks (1)
avatar
By snickersinatwix
10th Jul 2020 12:55

Thank you all for your responses, I really do appreciate your input. On the one hand we have all of you saying it won't work (and I do understand and appreciate your points and concerns) and on the other hand I have the client's solicitor who is sure 225B will work, is asking why I am looking into everything in such detail and why would I even MENTION the husband and wife can only have one PPR issue - keep quiet, carry on and pretend it never happened.

I won't be dealing with him again if I can help it.

Thanks (0)
Replying to snickersinatwix:
By SteveHa
10th Jul 2020 12:41

Solicitors and tax rarely make comfortable bedfellows.

Thanks (1)
Replying to snickersinatwix:
avatar
By Tax Dragon
10th Jul 2020 12:59

Who does s/he say should make the election?

(Why am I even asking that question?!)

Thanks (0)
avatar
By whitevanman
12th Jul 2020 11:46

As happens all too often, the OP is somewhat devoid of fact.
So, to sound a (possibly) dissenting note, have you read the HMRC guidance on the subject? It is no good reading just one bit but I would recommend you start with CG65356 and CG65365. Might give you something to think about.

Thanks (0)
Replying to whitevanman:
avatar
By Tax Dragon
12th Jul 2020 16:58

I'm not hearing a dissenting note; more an answer to a different question. That's not to say it's not the right question. As you say, to work that out we would need other information. I was doing my best - rightly or wrongly - to address the question asked.

Thanks (0)
Replying to Tax Dragon:
avatar
By whitevanman
12th Jul 2020 17:35

I could not discern the question being asked (apologies OP) so I answered one that might have (also) had some relevance. Makes the discussion more interesting without those pesky facts.

Thanks (0)
Share this content

Related posts