Separated taxpayer not liable for CGT on joint propertyby
A taxpayer who separated from her husband was spared a £14,000 CGT bill after the first tier tribunal found that she no longer held any beneficial interest in the pair’s joint property.
It’s interesting how quickly new legislation changes the mindset on basic issues. The rules on inter-spouse/civil partner transfers on separation were (at long last) modified to allow a no gain/no loss disposal for three years following the end of the tax year of separation, for transfers made on or after 6 April 2023.
The case of Wilmore v HMRC  UKFTT 858 (TC) highlights how inflexible the previous rules were in allowing no gain/no loss treatment only for the remainder of the year of separation. HMRC argued that the taxpayer, Abigail Wilmore, had not transferred her beneficial interest in a property to her husband during the year of separation, and had thus made a chargeable disposal in the following year when the divorce was finalised, and the property sold.
The good news is that despite the inflexibility of the old rules, Ms Wilmore has prevailed!
Wilmore and her husband, Mr Cohen, separated formally in September 2015. They had acquired a property at Thornhill Avenue (Thornhill) jointly in May 2015, at which point the intention was to use it as their main residence. Wilmore owned their existing home at Ravenshurst Avenue (Ravenshurst), which they retained with the view it would be let.
Cohen moved into Thornhill following their separation, and subsequently sold the property in September 2016.
Following an enquiry opened in March 2017, HMRC raised a discovery assessment on Cohen in November 2020, seeking CGT of over £14,000 on that disposal on grounds she had not disposed of her beneficial interest to Cohen prior to the sale.
An informal agreement that Wilmore would retain Ravenshurst and Cohen would retain Thornhill was made in December 2015, as evidenced by correspondence with lawyers. The non-property issues may have been subject to alteration between that date and the final consent order, but that order simply formalised the existing agreement.
The transfer of a beneficial interest thus took place in December 2015, and was made on a no gain/no loss basis.
The couple had not signed the Statement of Information, as the precursor to the Consent Order, until July 2016. The Consent Order itself was issued in October 2016, following the disposal and thus the transfer of ownership could not have occurred before that date.
The Land Registry entry stated Wilmore to be a transferor, thus she had an interest in the property and was entitled to a share of disposal proceeds.
The first tier tribunal found as fact that Wilmore never occupied Thornfield; that she took no part in any decision-making concerning the renovations or the sale of the property; that she did not share the costs nor the benefits from the renovations of the property; that she took no proceeds from the sale of Thornfield.
The Consent Order had provided that: “The applicant shall transfer to the respondent all her legal estate and beneficial interest in Thornfield Avenue subject to the Santander mortgage on or before 31 August 2016.”
FTT emphasised the importance of the fact that “a consent order is always preceded by an agreement reached by the parties; the court does not make the agreement for the parties. The ‘sanctity’ of agreements freely entered into between parties is fundamental in law”.
On that basis, the question was whether a constructive trust had arisen, under which Wilmore transferred her beneficial interest, prior to 5 April 2016.
The FTT cited the Court of Appeal in Paragon Finance v DB Thakerer & Co  1 All ER 400, where Lord Miller stated: “[A] constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually the legal estate) to assert his beneficial interest in the property.”
It then concluded that under the agreement entered into by the separated couple in December 2015, Wilmore in effect had transferred all her beneficial interest in Thornfield to Cohen. From December 2015 onwards, a constructive trust arose whereby Wilmore was the legal joint owner of Thornfield, but no longer held any beneficial interest in the property. As such, a no gain/no loss disposal took place in 2015-16.
Obviously, the new rules applying to such situations since 6 April this year have eased the need for immediate action in a period where emotions can be running very high.
Having said that, the paper trail of correspondence between Wilmore and her lawyers in this case was of paramount importance in assisting FTT to reach its conclusion. Where couples have separated, it would seem imperative that informal negotiations between them should be formally communicated and recorded to ensure that proper regard can be had to them.
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Mark Ward qualified with a large firm in 1989, having previously worked in the tax departments of a small and a medium size firm. He has been lecturing on a wide variety of tax matters for 30 years to qualified practitioners and industry specialists in the UK and overseas.