Capital gains tax calculation when selling a property on divorce.

Question:

I'm getting divorced and want to know what the capital gains tax position will be on my investment property.

The property was originally purchased in 2000 for £120,000 by my husband and was then let to tenants.

I married him in 2003 and the property title was transferred into my name in 2005 (when the value was £200,000.

We lived in the property as our main residence from 2004 until 2005. It has been let ever since.

The property is now to be sold as part of our divorce settlement and is worth around £240,000. We're expecting the decree absolute in March 2009.

Please can you tell my what my liability to capital gain tax will be when I sell the property for the divorce?

Answer:

The basic gain arising would be £120,000. The key point here is that the property was occupied as a main residence from 2004/2005. You would need to calculate the precise period of occupation as a main residence -- however I'll assume occupation was for 1 year.

Providing you can establish this period of occupation as residence you would be entitled to principal private residence ('PPR') relief on a disposal.

Where an individual has occupied a property as a residence for only part of his /her period of ownership then a proportion of the capital gain resulting on the disposal of the property is exempt. This is calculated on the following basis:

Capital gain x period of occupation/period of ownership

In addition to the period that an individual actually occupies a property as his/her residence, when calculating the period of occupation there are certain deemed periods of occupation which are allowed to be taken into account.

In your case the last 36 months of ownership would be deemed to be occupied by you irrespective of whether you actually occupied the property during this period. Please note that this relief will only apply where the property has been your main residence at some point during your ownership.

Where a property is let on an exclusive basis then clearly the owner individual will not be able to establish the property as his main residence for this period. However, a form of relief ('lettings relief') is available.

An exemption from capital gains tax is granted for that part of the gain attributable to the letting in so far as it does not exceed the lower of:

- the tax free part of the gain under the PPR relief
- £40,000.

Based on this, assuming an acquisition date of December 2000, and a disposal date of December 2008, PPR relief would be calculated as:

Period of ownership = Dec 2000 -- Dec 2008 = 8 years = 96 months
Period of occupation = 2004/2005 = 12 months + last 36 months = 48 months

PPR relief = 49/96 * 120,000= £61,250

Remaining gain = £58,750

Lettings relief = £40,000

Annual exemption =£9,600

Chargeable gain £9,150

The CGT charge on this would therefore be around £1,650.

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.

Google+

=============================================================

Disclaimer

i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.

ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.

These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.