A couple are about to separate and they wondered how best to do this to minimise their tax liabilities. They own two properties bought and jointly owned 50:50, i.e. a three-bed family home and a one bedroom flat which has been let out for the last 15 years (their first home). They have decided to divorce now and divide all their finances except for the properties which they intend to sell once their youngest child is 18 (in four years’ time). All costs related to the upkeep and finance will continue to be paid on both properties 50:50. The husband will move into the buy-to-let (bought in 1996 for £105,000 - value now £450,000) The wife will remain in the family home (bought in 2004 for £450,000, value now £1.3 million). Will the husband be liable for capital gains tax (CGT) on the family home? What is the implication of CGT on the buy-to-let if the husband resides there? What would be the best way for them to reduce the tax liability?
Arthur Weller replies:
Please see www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65365 and cg65376 re: a ‘Mesher order’. If the court makes a Mesher order, under which the sale of the family home is postponed, with a spouse and children remaining in occupation until a specified event, such as the children reaching a specified age, the private residence exemption can effectively be preserved. This arrangement is treated as a trust, and occupation of the property by a trust beneficiary qualifies for the private residence exemption. On the sale of the home by the trustees when the trust ends, the proceeds will not be liable to CGT. If the husband resides in the buy-to-let property, less of the capital gain when it is sold will be taxable on him, because more of the gain will be covered by private residence relief.
This question was first printed in Property Tax Insider in July 2017.