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Divorce Capital Gains

Divorce Capital Gains

Client separated in September 2013 and jointly held rental properties (retail shops and holiday flats) producing significant rental income were transferred to the husband before 5th April 2014 at no gain/no loss. Separation agreement gave the wife a maintenance of £34,000 per annum payable monthly for the rest of her life. There has been no decree nisi or decree absolute granted to date.

Husband from then on had to declare the rental profit in full and as this was over £100,000 he lost most his personal allowance and paid higher rates of tax. He couldn't sustain this tax hit each year so the proposal is that the wife is granted a lease of one of the retail shop properties for her life which has a rental income of £55,000 per annum and she gives up the maintenance in return. 

This will help his income tax position, turning a non-allowable maintenance payment into a reduction in his taxable income. However we now need to look at the capital gains tax position. At present they are still connected persons and market value is used which I would guess is in excess of £400,000. Can anyone see any problems if this lease is granted after the decree absolute when they are then not connected? Does the fact she gives up her right to maintenance at the same time affect this position?

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26th Feb 2016 03:57

I can't see any problems in so far as after the decree absolute, they are no longer connected parties.

Regarding your final question, as far as I am aware this wouldn't affect the position, however I cannot say for sure.

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26th Feb 2016 09:11

No problem, did a divorce case in Canterbury court few years back and this was almost exactly what had been proposed (by me as it happens) and court said fine, and been doing the tax return of one of the couple since and no problems.

Do have to be careful for husband that reflected in final decree as it could still say full maintenance payment if not picked up by his legal team

Also do be careful it is arms length lease otherwise in future HMRC could try and get interested, probably they would fail, but why give them the chance to ask questions

 

GYBEA.co.uk

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By Andyphi
26th Feb 2016 09:27

Just to be sure

Timothyvogel could you set out exactly what should happen. I thought the decree absolute should go through first with the maintenance still included and then the lease is granted after that with retraction of the maintenance at the same time. If the lease is included in the decree absolute will that not make it a connected person transaction still? Also, can this transaction ever be at arms length?

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29th Feb 2016 13:32

The legal bits

The way it worked was the decree absolute went though with the maintenance replaced by lease.  It is a connected party transaction in the sense of CGT etc but it is done at market value, with a proper lease documents giving all the things that a arms length transaction has like rent reviews.

If you do the decree then replace it with lease, the "wife" can always go to court to enforce the maintenance payments.  the Arms length stuff is that it is on the exact same terms as an arms length transactions would be, and is need to allow it to be a deductible expense for the "husband" going forward as if not HMRC could claim you are still related parties despite not being married anymore.

Give me a call if more details needed

 

gybea.co.uk

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By MBK
26th Feb 2016 14:13

Surely ....

... this falls straight into TCGA92 S17. 

Parties do not have to be connected for the non arms length rule to apply.

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By Andyphi
29th Feb 2016 12:17

Thanks MBK for that. Client still doesn't want to pay any CGT so now looking at gift holdover by putting it into a trust. Obviously IHT implications depending on its value so whatever he does tax could be payable. Can see no other way out of this.

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