Property pitfalls in divorce
June 2016: The monthly meeting of the Croydon and South East London Tax Discussion Groups considered the tax impact of Principle Private Residence on a divorcing couple.
The query concerned the treatment of Principle Private Residence (“PPR”) relief under s225 TCGA 1992 and related guidance where a married couple separate and then divorce.
A husband and wife lived together in a flat owned by the husband from 2003 until 2008. At that time they were jointly able to purchase a house to live in as their main residence. They were in the fortunate position to be able to rent out the flat rather than have the husband sell the property.
They lived together in the house until 2010, when their marriage dissolved and they separated. In this instance, as the flat was empty the wife moved into it although it continued to be owned by the husband.
The couple began divorce proceedings shortly after their separation when it became clear that they could no longer resolve their differences. The result is that the wife has not lived in the marital home that she owns half of since 2010. The husband has a flat that he has not live in since 2008, but which his estranged spouse has occupied under licence since 2010.
For tax purposes under s58 TCGA 19927, the year of separation is the last year in which a husband and wife can benefit from the husband and wife tax exemption for no gain/ no loss transfers of chargeable assets. While they may not be able to transfer assets on a no gain/no loss basis, they remain taxable as connected parties under s286 TCGA 1992 and therefore the transfers of assets between them remain taxable.
In chess terms this could be the “endgame” as HMRC could pursue them to ensure that tax is payable on the transfer of the wife’s interest in the house to the husband with the wife receiving the flat as her consideration. If the tax world did not intervene then this may be a fair distribution of assets. The husband, in this instance would take over the mortgage for the house. The relative equity in either property is broadly similar and a cash adjustment between them could suffice.
However this is where the tax legislation intervenes. A husband and wife can only have one main residence. So the PPR legislation sets out that additional considerations need to be applied to extend the main residence relief in such circumstances. These conditions are set out in s225B TCGA 1992:
- Condition A is that the disposal is subject an agreement between the individual and his spouse in connection with the dissolution or annulment of the marriage, their judicial separation, making of a separation order or a court order.
- Condition B is that during the period between when the individual ceases to reside at the property, that it remains the main residence of their spouse.
- Condition C is that the individual has not given notice that another property is to be treated as their main residence for any part of the period.
In the circumstances set out above the wife may be able to claim the extended PPR relief on her former home if she is willing to accept the restriction to the claim on the flat. Her former husband will have a tax liability on the transfer of the property to his wife.
Accordingly the challenge for the respective divorce lawyers is while the tax at stake can be quantified under existing tax legislation, the actual liability is dependent upon their client being aware of the PPR legislation and moreover accepting a tax liability on their former home.
Each month (with the exception of July and August) the Tax Discussion Groups in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.
- Builder’s firm tax foundation
- Relief of living together