Q Could you please assist me with the following complicated but not uncommon situation. In 2001, I bought house for £167,000 with my then wife. In 2005, we let the house out. In 2013, we divorced and I mortgaged the house to be able to buy out my ex-wife.
In 2015, I remarried and gave my new wife half the property for mortgage and tax purposes. We are now considering selling the house for around £400,000. The house is still let and has been for around 136 months.
Am I right in thinking that my ex-wife was liable for capital gains tax when she disposed of her share by selling it to me? And would I be liable for capital gains tax (CGT) if I sold the house today? Would I be advised to move back into the house for a period of time to limit my exposure to CGT? AH
A Whether you are right in thinking that your ex-wife was liable for CGT when she sold you her share – not that it’s any of your business – depends on when the disposal took place.
If she transferred her share to you before the end of the tax year in which you separated, then – like transfers of assets between spouses who are not separated – the transfer would be treated as giving rise neither to a gain nor a loss, so no CGT would be payable.
If the transfer took place after the end of the tax year that you separated, your ex-wife may be liable for CGT but that’s between her and her tax office. More information is available in Helpsheet 281 – “Spouses, civil partners, divorce, dissolution and separation” – from HM Revenue & Customs (HMRC).
You too would be liable for CGT if you sold the property, but only on your share of the gain and probably not on the whole of that. The fact that you say “move back into the house” suggests that when you first bought the property with your now ex-wife, it was your home until you let it out in 2005 so the answer to your last question is: you don’t need to move back in to minimise your tax bill.
The fact that you lived in the home before letting it out means that you qualify for partial “private residence relief”, which makes part of the gain tax-free. You can work this out by taking the number of months you lived in the house plus 18, and then dividing that figure by the number of months you owned the property. Multiplying this fraction by whatever the gain is (what you sold it for less what you paid for it, legal fees and stamp duty) gives you the amount of private residence relief you can subtract from the gain to reduce the tax you pay.
If you moved back in, the fraction would be calculated differently. Rather than adding 18 to the number of months you lived in your property, you would add the number of months out of the final 18 of ownership not covered by actual occupation. So, for example, if you moved back in for six months before selling, you would add 12 to the number of months you lived there.
Since you let the property, you may also qualify for “lettings relief”, which also reduces your tax bill. The amount of the gain qualifying for lettings relief is the smallest of: the gain attributable to the period of letting (calculated by multiplying the gain by the number of months the property was let then dividing by the number of months of ownership); the amount of private residence relief you’re entitled to; and the maximum lettings relief of £40,000. More information on calculating lettings relief is available in HMRC’s Helpsheet 283 on private residence relief.
https://www.theguardian.com/money/2016/aug/25/sell-house-renting-out-capital-gains-tax
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