Various Tax Considerations on Properties after Divorce
My client has an issue with stamp duty land tax as a result of his divorce and the purchase of a new home.
The Land Registry will remove his name from the title deeds of his previous marital home, but he will have a charge of 40% over it. My opinion is that he is no longer an owner and his share is, in effect, an investment. Does this mean that stamp duty land tax is due at the normal rate on the purchase of his new house rather than at the increased rate for a second property? And when the marital home is eventually sold, will he be liable to capital gains tax on the increase in the value of the house?
Before this happens, it has been agreed that the ex-wife will give him 40% of rental income from any Airbnb sales while they are looking for a potential purchaser.
Can readers advise on the various tax implications facing my client?
The 3% SDLT surcharge will apply if the client owns a major interest in another dwelling on the effective date of purchase of the new home. A ‘major interest’ is a freehold or leasehold interest in law or in equity, but excludes leases originally granted for seven years or less. The major interest must be worth £40,000 or more and not be reversionary on a lease with more than 21 years to run.
If the client’s charge is a security interest and he has no beneficial interest in the property the surcharge will not apply to his new purchase. A ‘security interest’ is an exempt interest and is defined as ‘an interest or right (other than a rentcharge) held for the purpose of securing the payment of money or the performance of any other obligation’. However, it seems from what Divorcee says that the client is securing a 40% interest in the proceeds of sale rather than a specific monetary sum. If this is correct, he is likely to have a beneficial interest, in the property in which case the surcharge would apply.
The capital gains tax treatment will also depend on what the client is securing with the charge. Did he have a 40% share before the divorce? Was a share transferred to him as part of a financial settlement? If so, what were the terms? Why is the client being removed as a legal owner?
If the client does have a beneficial interest in the property (which seems likely) capital gains tax will be chargeable on any gain in the normal way.
The agreement as to the Airbnb income does not affect matters.
For more information on this topic please refer to Ann’s free questions and answers resource on SDLT and divorce.
This article appeared on the Taxation website on 9th January 2018 and is reproduced here with permission.