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CGT & Dependent Relative Relief

CGT & Dependent Relative Relief

The circumstances are:

  • Husband buys the matrimonial home in his sole name in 1982
  • Husband moves out in 1992, but the (separated, but never divorced) wife continues to live in the house, with the husband paying the bills
  • Wife dies in 2011 and husband sells house

My immediate thought was that he can have only (10 + 3)/29 of the gain tax-free under the private residence relief because although still man and wife, they were no longer living together and hence, he did not have the same private residence from 1992 to 2011.

Then, I remembered something called Dependent Relative Relief which was abolished long ago (actually turned out to be from 6th April 1988), but was in force in 1982 when the house was bought.  Although husband and wife were living together in 1988, did she subsequently become a dependent relative in 1992 and if so, is the husband entitled to have the entire gain tax-free?  I think that although "dependent" financially, the separated spouse was not incapacitated or elderly, so probably did not meet the definition of a "dependent relative", but I would be grateful if anyone could contradict me.


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11th Jul 2012 15:20 

The wife is not a blood relative nor was she 65 or infirm when he purchased the property.

Regards Peter

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11th Jul 2012 23:47

Isn't it a settlement?

My trust law's not all that good, but hasn't the husband effectively settled an interest in possession on his estranged wife, such that S.225 TCGA 1992 exempts the gain? HMRC would have thought so if it was Arctic Systems' profits the wife was enjoying, without an interest in the capital.

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11th Jul 2012 17:04

Dependent Relative Relief

I agree with Pete that the relief is not available. Bizarrely, if his fully fit mother or mother-in-law had been the occupant of the property before 5 April 1988 and had never paid rent, he would have qualified. One wonders what was in the law drafter's mind when this sexist law was made! It would have been even easier for the property owner with the existence of ESC D20 which allows the tenant to pay rates, repairs and mortgage payments subject to the owner not making a profit.


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By LyneT
11th Jul 2012 18:34

Euan I agree with you that wife will not qualify under the dependant relative relief.

If the property was dealt with under a Mesher or Martin order, Steve Kesby is right and it may be that a trust was created and therefore PPR relief is available.  See this to the last poster, yes, a trust return would have been required, but no 10 year charge as this would be an interest in possession trust (pre 206)  In ans I i.  .  In answer to the 

Your client would know this as they would have had to inform HMRC of this.  Even if HMRC were not informed, it would be easy to prove through court records.  Having said that, by the tone of your question, it would suggest that the arrangement was informal, so no Mesher/Martin order, therefore no trust, so no PPR.

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11th Jul 2012 21:45

I was thinking more along the lines...

.. of the common intention constructive trusts mentioned at the foot of CG65415, but it was a somewhat speculative suggestion.

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12th Jul 2012 10:31

Thank you, everyone

We are all agreed that the husband is not only not entitled to relief as his private residence, but also not entitled to dependent relative relief.  There was no divorce, so a Mesher order does not apply and certainly, no trust paperwork has been filed.

I was intrigued by Steve's suggestion of claiming relief under s.225 on an interest in possession trust and have researched the CG manual pages.  I came to the conclusion that as there was no trust paperwork, it could not be an express trust, which left the possibility of a common intention constructive trust.  Although I do not doubt that the common intention existed, CG65422 says that the relief is only available if the beneficiary (the wife) "acted to her detriment" and CG65427 says that the detriment must be significant.  In this case, the wife has lived the life of Riley (OK, she is not Irish, but she is Catholic and would not agree to a divorce) at the husband's expense, so a claim under s.225 would fail.

Thank you for everyone's comments.  He will just have to pay a lot of CGT!

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12th Jul 2012 11:06

I've reached a similar conclusion

I've got to essentially the same conclusion Euan, but we're relying to a certain extent on HMRC's interpretation/presentation of the position, and I wasn't entirely sure whether they would be correct on the acting to her detriment issue in these circumstances.

The case law they're considering is where a cohabitee claims a beneficial interest in the capital of a property in excess of their legal interest.  It's reasonable to impose actions to their detriment on them to achieve that.

Where an interest in possession is being settled, I'm less sure that the courts would require the recipient of that interest to take any action to their detriment.

It's academic though, because if you get a pre-2006 IIP, the asset is disposed to the trust at MV when it goes in (realising the husband's PPR at that stage) and then when the wife dies and the whole interest reverts to the husband, it comes out nil gain/nil loss under S.73(1)(b) TCGA 1992 (See CG65428), ie at the market value it went into the IIP (so there's no gain to be covered by PPR), and the resultant gain in the husband's hands gets no PPR.

So you get a worse case, if you can successfully argue that there was an IIP settlement. So you're definitely better off leaving the point.

I'd have thought that the same might well be true under a Martin order (as I understand them) in these circumstances (ie occupation by the ex-wife until death). Not sure whether LynneT would agree?

The next thing to think about would be lettings relief.

To be "let", rent must be paid (in money or money's worth see CG64713), but you might argue that the husband's obligation to maintain his former wife has been provided in the form of allowing the wife to occupy the property under licence, such that the rent not being paid by the wife equates to the maintenance not being paid by the husband.

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By LyneT
13th Jul 2012 11:15

I have to say I had not considered a constructive trust because, I think, on the facts of this case, there is no constructive trust.

Normally in the cohabitees situation, the type of trust which would be created would generally be a bare trust rather than an IiP trust.  However, generally when such a situation is claimed is the intention both parties would contribute equally, pay bills equally etc.  However, it would appear here that the husband pays everything.

I would be surprised in this instance whether HMRC would agree that a constructive trust exists.

I would be interested to know how this was dealt with in the estate of the wife.

If this indeed had been a constructive trust then the house would be treated as part of the wife's estate for IHT.

If it had been a bare trust then 1/2 would be included in her estate.

If it had been an IiP then the whole of the house would be included in her estate, this being a qualifying IiP, (ie one created pre FA2006)

I do not think from the facts above that a trust was the intention.  If you have reason to believe that a trust was the intention Euan, then you will clearly have your reasons for thinking this and you may be able to claim this.  I have seen secret trusts in wills and it is very difficult to prove that a trust exists, particularly when means tested benefits are involved. 

In terms of Mesher/Martin orders, just because there was no divorce does not mean that there can be no maintenance order, so it may be that one exists.  Are there any children?  Because if there were none this sounds like an exceedingly generous man if he has not been forced by court order to pay. 

Interesting discussion.

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