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Separation and swap
In 1982, our client died intestate. By a deed of family arrangement, his wife inherited the family home and an adjacent property; their two sons inherited everything else jointly. 'Everything else' included a four-bedroomed house with garden, which was valued at that time at £20,000. Both sons lived at home with their mother at this time and the house was divided into two flats and let out.
Separation and swap
In 1982, our client died intestate. By a deed of family arrangement, his wife inherited the family home and an adjacent property; their two sons inherited everything else jointly. 'Everything else' included a four-bedroomed house with garden, which was valued at that time at £20,000. Both sons lived at home with their mother at this time and the house was divided into two flats and let out.
In 1988, the brothers decided to refurbish the house and build a second house in the garden. In 1989, one son moved into the original house and the other into the second house. It was intended that ownership would be separated out, but the solicitors were slow, the Budget intervened, and they were advised that conveying the property into separate names would give rise to CGT liabilities, so the situation was left untouched.
Now the sons would like to divide up ownership and estimate that each house is worth about £250,000. Can they divide the property without a CGT liability? Does ESC D26 apply here?
(Query T16,563) — Twinned.
I will denote the son living in the original house as A and the son living in the other house as B. On a disposal of their half interest in the other's house, there will be a chargeable disposal for CGT and the proceeds will be the market value of the half interest.
Both A and B face the same tax problem of selling half of a house that they have never lived in.
Extra-statutory Concession (ESC) D26 can operate to ensure that a capital gain does not arise on an exchange of land. Normally, the concession does not apply to land that is or becomes part of a dwelling house, but there is an exception where a disposal of the entire asset immediately after the exchange would be exempt by reason of TCGA 1992, ss 222 and 223. A and B acquired A's house in 1982, but A only moved into it in 1989. For B, he may have moved into the new house straight away in 1989, but the land on which it is situated was also acquired in 1982 and only part of the gain on each house would be exempt.
For A, his house was let out for seven years and so letting relief would be available under TCGA 1992, s 223(4). Is A married? If so, he could transfer his half interest in his house to his wife now. This would mean that his notional gain on a sale immediately after exchange would be halved. This might increase the amount of letting relief available such that the entire gain would be exempt.
The difficulty is that, for ESC D26 to apply, the notional gain for each of A and B on a sale immediately after exchange must be entirely exempt. The house occupied by B has never been let and so letting relief would not be available.
If A and B are to come within the terms of the concession, a situation will have to be created whereby the entire gain on a sale of the house occupied by B could be exempt. For this to happen, B will have to be married, he will have to transfer half of his half interest to his wife and they will have to move out of the house for a time and let it so that letting relief can be secured. This is a possible option, but it seems unlikely.
Any transfer would also be liable to stamp duty land tax (SDLT), which each of them would have to pay at 1% of the value of the half interest that each is acquiring.
