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.
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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!)
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.
'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.
Surely, in the circumstances you describe, S225B(2) fails.
But don't listen to me, I'm unqualified.
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.
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.
Which brings us back to my original thoughts. The disposal to her now was never a part of any agreement, and so fails S225B.
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.
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.
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!
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 ;)
...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.)
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.
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.
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:
'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 [***] 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.
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.
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.)
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.
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.
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.