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The Scotsman: Watch your step with Capital Gains Tax property rules

andrewMurray Beith Murray Partner, Andrew Paterson, explains Capital Gains Tax liability on the sale of a property, in response to a reader’s question in a recent edition of The Scotsman. Read the full article below, republished by kind permission of The Scotsman:

QAbout 18 months ago, my husband and I decided to separate after nearly 30 years together. The arrangement is very amicable and we are both now in new relationships.

We jointly own a property worth £770,000. It was bought for £590,000, in September 2016.

We both lived there full time from that date until July 2019 when we split up.

I rented a flat nearer my job for a few months while we worked out the details, but I returned to the house four times a week to help our teenage son with homework and stayed overnight with him when his father was away once a week. So, I felt that it was still my main home, although I did register for council tax at the flat and changed the details on my driver’s licence.

We put selling the house on hold during the pandemic, so I stayed on at the flat. We were in a family bubble and spent time together doing up the house ready for sale.

My husband and I are now divorced and both keen to move on. However, I’ve been told that because the house is no longer deemed my main residence, I will be liable to pay Capital Gains Tax [CGT] on my half of the profit.

I earn a modest teacher’s salary, while my husband has a six-figure one. He, however, will not be liable for CGT because he is judged to be selling his main residence, which I think is unfair. Is there any way I can appeal?

ACGT is a tax on the profit you’ve made when you sell an asset that has increased in value while you have owned it. As with all taxes, there are a number of reliefs and exemptions, but – you’ll not be surprised to hear – these each have their own complex rules and qualifications.

Private residence relief applies when someone sells their home and will normally mean that no CGT is due on such a sale. For that to be the case, however, the seller must have lived in the property as their main residence for the whole time they owned it. In your case, you lived in the property for almost three years, but it may not be considered your main residence after July 2019.

As an aside, if you own more than one home, you must nominate which one should be considered your main residence for CGT purposes. This is something that some politicians with second properties in London and constituency homes took advantage of a few years ago.

The difficulty for you, however, is that when you changed details on your driving licence you would appear to have shifted your main residence to your rental flat.

It is unlikely that your return visits to the family home – albeit, they were regular – will be sufficient for it to be still classed as your permanent residence.

However, other evidence which could be relevant includes whether or not you changed your address for your bank, GP and on the electoral register.

There are various special tax rules which apply when a couple separates.

In relation to CGT, it would have been possible for you to claim private residence relief in respect of your whole period of ownership, but only if you were transferring your share in the property to your husband.

If private residence relief is not fully available to you, the calculation of your CGT liability is, unfortunately, not entirely straightforward.

1. Calculate gain

This is normally your share of the sale price less the purchase price. You can reduce this gain by deducting sale and purchase expenses, such as legal and surveyor’s fees, as well as the cost of any improvements made, such as a new kitchen or bathroom.

Routine maintenance costs, such as painting and decorating, cannot be deducted.

2. Calculate period when relief is available

In your case, this will be a percentage of your total ownership period as you moved out in July 2019. Let’s assume that you sell the home this September, which will mean you will have owned it for five years (60 months) in total.

Relief is available for the period you actually lived there full time – in this instance 34 months. There is also a special extension of the rules which allows you to add in the last nine months of your ownership, which brings your total to 43 months.

Relief is therefore available for 43/60 months – for example, 71.7 per cent of the gain. This means that if your gain, calculated in step 1, is £100,000, then the remaining £28,333 will be chargeable.

3. Deduct annual exemption

Just as you don’t start paying income tax until you’ve earned a certain amount, the same applies to CGT. In the current tax year, the first £12,300 of your chargeable gains are not taxable. Using the figures above that would reduce your taxable gain from £28,333 to £16,033.

4. CGT rate

What you actually pay in CGT, if it applies to a house sale, depends on your income tax bracket, and is charged at 18 per cent or 28 per cent for higher rate taxpayers.

Finally, I should highlight that the rules regarding the due date for CGT payments on property sales have been changed recently. Any CGT due must now be paid within 30 days of the sale date and a CGT return sent to HMRC within the same period.

The personal legal view expressed above is general and limited to the facts provided, it cannot be relied upon as an alternative to specific and comprehensive legal advice. You should always consult your lawyer if you have a question about a legal matter.

Murray Beith Murray, Edinburgh

Murray Beith Murray are specialists in asset protection and tax. If this article has raised any questions or you would like to discuss your personal legal affairs with one of our expert estate planning lawyers, then please complete our contact form or call us on 0131 225 1200.

Murray Beith Murray was established in 1849, as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day as does our commitment to be here when you need us.

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