Capital Gains Tax on Property after Divorce

Question:

I bought a property in 1993 for £40,000 which was let out to tenants. The mortgage was in the name of me and my wife.

We were unfortunately divorced with the decree nisi coming through in 2004 and she was awarded this house.

I continued to pay the mortgage, until 2007, when the property was sold and she took all the proceeds of the sale.

The property was always let out during and neither of us ever lived in the house.

The house was sold for £150,000 and she took all of the proceeds as her divorce settlement.

Please could you tell me what, if an capital gains tax liabilities there are and for who?

Answer:

Any CGT payable on a disposal would be payable by your ex wife, as it is she who is the owner (both legally & beneficially) of the property.

The general rule is that assets transferred between spouses are tax free, with the receiving spouse being deemed to have owned the asset from the date of the transfer spouse (along with the same cost). This treatment continues for the entire tax year that a couple are separated

Where a transfer is made under a court order before the decree absolute, the proceeds are deemed to be the market value of the asset at the date of transfer, and the date of disposal is the date of the court order.

Therefore, on the earlier transfer of your interest in the property to your wife, this would have represented a chargeable event for CGT purposes. It would be likely that the disposal of your half interest would be deemed to be made at the market value of the property at the date of the transfer (this assumes that any transfer of the property was not made in the tax year that you became separated).

Therefore, a gain would have arisen on the earlier transfer. Example: If the market value of the half interest was £50,000, the gain calculation would be:

Proceeds £50,000

Cost (£20,000)
Gain 30,000
Indexation relief (3,000)
Taper relief eg @25% (6,750)
Gain 20,250

Assuming you had the annual exemption available (ie no other gains in the tax year), this would be offset, and the remaining gain charged at charged at your marginal rate of tax eg 40% if you were a higher rate taxpayer. This assumes a disposal of your interest to your wife in 2004.

Your wife will then effectively have two interests in the property, one interest with a cost of £20,000, and the second with a cost of the market value at the date of the transfer to her (in the example above £50,000). The indexation allowance will only be available on the cost of £20,000, as above.

On a final disposal of the property she would then need to calculate her capital gain for the two interests (ie the proceeds of £75,000 split between the two gain calculations and each taking a different cost figure as above)

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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