My query concerns Mesher Orders whereby under a court order upon divorce, the matrimonial home is held on trust, at least until the earliest of several specified events (in this instance, the 18th birthday of the youngest child of the marriage) with one of the spouses being entitled to occupy the home for the trust period.
I wonder exactly when the trust established by the Mesher Order comes to an end?
My query concerns Mesher Orders whereby under a court order upon divorce, the matrimonial home is held on trust, at least until the earliest of several specified events (in this instance, the 18th birthday of the youngest child of the marriage) with one of the spouses being entitled to occupy the home for the trust period.
I wonder exactly when the trust established by the Mesher Order comes to an end?
In the case I am dealing with, the divorce Consent Order states that the property is to be held by the parties on trust for sale and that the terms of the said trust for sale shall be that (a) the petitioner (the wife) shall have the sole use, occupation and benefit of the said property until sale; and (b) the said trust for sale shall not be executed until the trigger event.
My understanding is that after the trigger event the husband could have enforced a sale of the property.
As the youngest child of the marriage became aged 18 in 1993 and the property was only sold in March 2005, the husband will have a significant liability to capital gains tax on his half share of the gain if the trust established by the Mesher Order came to an end upon the trigger event in 1993.
However, given that the sub clause (a) of the trust gave my client's wife 'sole use, occupation and benefit' of the property until sale, rather than until the trigger event, would not the trust simply continue until sale with the trustees being entitled to only or main residence relief under TCGA 1992, s 225 on the basis that my client's ex-wife lived in the property up until the time of sale?
Query T16,696 — Backwoodsman.
Reply by Digby Bew:
The answer as to when the Mesher Order settlement ends, or, in the terms of the applicable legislation (TCGA 1992, s 71), as to when a beneficiary becomes absolutely entitled to the settled property as against the trustees, requires a careful review of the terms of the court order and any related documentation.
When the court order was originally made there would have been a disposal of the property for capital gains tax purposes to the Mesher Order settlement; thus, whilst the husband (H) and the wife (W) might have continued to hold the legal estate of the property in their joint names, the effect of the order was to create a new set of equitable beneficial entitlements in the property, with H and W acting as the trustees of the new entitlements. It is unlikely that that this disposal would have triggered a capital gains tax charge. In W's case she would have the benefit of main residence relief, and in H's case, if the disposal took place within three years of the date of separation, no charge would arise on any part of his resulting gain (TCGA 1992, s 223(1)); if the three-year period has expired, a proportion of the gain might be chargeable but, subject to complying with stipulated conditions, a capital gains tax charge could be avoided by applying Extra-statutory Concession D6.
As the Mesher Order settlement has run its course, the analysis for capital gains tax purposes depends upon distinguishing between the vesting event on the one hand and the administrative mechanism by which such vested entitlements are realised on the other.
The purpose behind the order will have been to ensure that W and the children of the marriage have a home during the youngest child's minority, in effect postponing a financial division of matrimonial assets between H and W until this first objective has been achieved. It is more than likely that once this first objective has been achieved, the court has recognised that H and W should be able to realise their respective interests in the property by providing for absolute entitlements at the relevant trigger event with an administrative mechanism to achieve the division of the asset through imposition of a trust for sale, putting H in a stronger position to force a sale of the property to realise his financial interest in the property (see, for example, Trusts of Land and Appointment of Trustees Act 1996, s 15), whilst allowing W to continue to occupy the property as her home until the property is sold.
If that is, indeed, the interpretation, then under the terms of the order both H and W became absolutely entitled to the Mesher Order settlement assets at the date of the youngest child's eighteenth birthday for the purposes of TCGA 1992, s 71 with the deemed disposal and reacquisition by the Mesher Order settlement trustees provided for in that section, but with the benefit of the TCGA 1992, s 225 exemption for the trustees on the basis that a beneficiary, namely W, has occupied the property throughout the period of the trustees' ownership.
Once the absolute entitlement is established in 1993, the property is held on a bare trust for H and W from then on; this new trust is fiscally transparent (for capital gains tax purposes per TCGA 1992, s 60), and the s 225 trustee exemption cannot apply to the sale of H's property share in 2005. To make matters worse for H, the effect of the deemed disposal and reacquisition in 1993 will also mean that no period in which H had previously occupied the property during his marriage to W would be taken into account to provide some proportionate measure of main residence relief against the gain arising to H on his 2005 disposal (TCGA 1992, s 222(7)).
Reply by Neto de Conde:
A Mesher Order does not create a substantive settlement because all it does is to prevent the ex-husband applying to the court for an order for sale under what would now be the Trusts of Land and Appointment of Trustees Act 1996, s 14 and s 15, before the trigger event. Although it may amount, until that event, to a notional settlement for inheritance tax purposes under the wording in IHTA 1984, s 43(2)(a), in strict law, TCGA 1992, s 60 should mean that it is classified as a bare trust throughout for capital gains tax purposes.
HMRC's official stance is, however, somewhat different.
- Under paragraph CG65367 of the Capital Gains Manual, the making of the order is treated as a transfer into settlement, and therefore an event of disposal of the house itself under TCGA 1992, s 70. This is normally exempt from charge under the only or main residence exemption.
- Paragraph CG65368 then states that, up until the triggering event, the ex-wife is treated as having a qualifying interest in possession under TCGA 1992, s 225.
- At the end of that period, paragraph CG65369 treats there as having been a deemed disposal (but again no charge by reason of the only or main residence exemption of the ex-wife) under TCGA 1992, s 71(1).
- It follows from this that, under the official practice, the ex-husband will have been deemed to have 'reacquired' his half share in 1993 and not to be able to claim the 'final three years of ownership' relief under TCGA 1992, s 223(2)(a) and the 'immediate sale' example in paragraph CG65376 supports this construction.
The effect on most divorcing couples of HMRC abandoning their official practice would be such that, as a matter of policy, they are unlikely to be willing to consider an alternative computation which produced a lower tax bill for the ex-husband by calculating the indexed gain from the original date and amount of purchase and time apportioning this over the period of joint matrimonial occupation and the last three years of ownership; but without any s 225 period.
