Divorcing to avoid Capital Gains Tax (CGT) - tax and financial advice from independent financial adviser (IFA) Isis Financial Planners
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for May 2010. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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Articles in May:
- How changes in Capital Gains Tax by the new coalition Government could affect homeowners
- Divorcing To Avoid Capital Gains Tax On Property
- How changes in Capital Gains Tax by the new coalition Government could affect homeowners - 19 May 2010
What's the background?
Just two years ago, Alastair Darling simplified Capital Gains Tax (CGT) by sweeping away various reliefs, including indexation and taper relief, in return for a low flat rate of 18 per cent. It was too good to last. Now it looks as though we’re going back to something more like the pre-2008 system, with CGT rates “similar or close to” the income tax rates of 20 per cent, 40 per cent and 50 per cet. But we do not as yet have details of how the new regime will work – these will be announced in the emergency budget, which is on June 22.
What assets will be affected?
We know that the new rates will apply to “non-business assets”, a category that includes buy-to-let properties and second homes, as well as other investments. To sweeten the pill, the Government could bring back taper relief or something similar. This rewarded long-term ownership by gradually reducing the tax on assets owned for three years or more before sale. But with reducing the deficit their main priority, they may choose not to introduce new reliefs.
Will the annual exemption survive at current levels?
At present, every person has an annual exemption of £10,100 – only gains over this amount are taxed. The Liberal Democrats would like to reduce the annual taxfree gain to only £1,000. Will they get their way? The Coalition Agreement makes no mention of any change to the allowance.
When will the changes take effect?
We don’t know when the increase will take effect. It would be difficult to have different rates in one tax year, so the best guess is that the new rates will apply from 6 April 2011, giving people time to sell at the old 18 per cent rate.
- Divorcing To Avoid Capital Gains Tax On Property - 12 May 2010
When I was a young tax trainee, there would always be somebody in the class who would suggest this, jokingly, as a wizard wheeze. Everybody would laugh because it was right up there with death as a way of avoiding CGT – effective, yes, but not something that anyone would choose to do. In my 30 years in tax, you are the first person who has ever suggested it seriously.
The rules state that you must be separated in such circumstances and that the separation is likely to become permanent. Clearly, this would not be the case. If HMRC were to catch wind of your real circumstances – and this is just the kind of wheeze that produces anonymous tip-offs from jealous or outraged family and neighbours – it could withdraw the Principal Private Residence relief on the sale of your “wrecks” so that the whole gain would be taxable.
There is a sub-section in the act stating that the relief does not apply at all where a property was purchased, wholly or partly, for the purpose of realising a gain on sale. I don’t think HMRC would have any qualms about using that provision in your case.
Alternatively, it could decide that you and your spouse are trading as property developers and levy income tax on the profits instead.
If the true facts were to come to light as a result of an inquiry after your “reconciliation”, you would face interest and a penalty based on your degree of culpability. Where the error is deliberate and concealed, that is likely to be between 50 per cent and 100 per cent of the additional tax due. In addition, if the tax loss is more than £25,000, you could be named and shamed on the HMRC website. Do you really want to risk that?
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