CGT liability on marriage separation

[danash]

Hi,

Back again with another question on my impending marriage break up. If I was to move into an investment property I own as part of a separation arrangement does that property become my principal private residence and as such be free from CGT on sale or would I have always have a liability for the gain currently accrued in the property ( bought for 345000 - curently worth 600K ) ie is the value for PPR purposes only set at the time I convert it to my PPR ?

 

[ClubMan]

I wouldn't expect all CGT liabilities on the eventual resale of a property that was rented out at some stage to disappear in the circumstances that you describe but I could be wrong. I presume that you've seen although I don't think that it deals explicitly with the situation that you describe above.

If CGT remains an issue as normal then the market value at the time that it becomes your PPR is irrelevant - that is not the way that CGT on a property that was at different times a rental property and a PPR is calculated. The way it is done is illustrated by the following example:

Property owned for 10 years
Property rented out for 4 years
Property occupied as a PPR for 6 years

Then (10 - (6 + 1)) / 10 = 3/10 = 30% of any eventual resale gain is assessable for CGT.

I'm not sure if the separation situation affects this at all but suspect not.

 

[cosmo]

That formula is very unfair for properties purchased in the last 15 years, that's for sure.

You could have bought a house for €100,000 10 years ago, and rented it out for 4 years at which point it may have been worth €200,000 and then moved in. Now 6 years later you want to sell it and it may well be worth €500,000. (typical property price growth for nice Dublin suburb)

So instead of owing CGT of 20% of your gain whilst it was an investment property, i.e. 20% of €100,000 gain which = €20,000 CGT

YOU OWE
(10 -(6+1)/10 = 3/10 = 30% of eventual sale price
30% of €500,000 = €150,000 CGT

That is a very big difference.

Not a very equitable system in a climate of steep property price infaltion.

 

[gidxl03]

Cosmo, I think that you have misunderstood Clubman's statement;
"30% of the gain is assessable for CGT."

My understanding is
* the effective rate of CGT drops from 20% to 20 x 0.3 = 6%.
* the gain is approximately 500 - 100 x 1.026 = 397 K

Therefore CGT is 6% of 397 K = 23.8K

Also, if you are not selling any shares in the year that you sell the property, you can avail of your annual CGT allowance of 1270.

Therefore your bill will be 22.6 K

Big difference!!

Notes
* Your annual allowance of 1270 is NOT cumulative so you cannot multiply it by the number of years that you owned the house.
* Factor 1.026 links your initial cost up to 2003 after which index linking was abolished.
I doubt if many people realise the implications of scrapping the index linking. Mathematically it means that,assuming that the property increases in value in the long term, the longer you retain an investment property, you will pay closer to 20% NET of the sale price rather than 20% of the GAIN.
i.e. CGT bill = (P2 - P1) x 20% which gets closer to P2 x 20% where P2(sale price) >> P1(initial cost, index linked as far as 2003)
See http://www.unison.ie/features/budget2003/taxproperty/stories.php?ca=275&si=887763

 

[danash]

Hi - I want to reopen this as this is now coming to pass.....the Revenue have told me that I have to pay CGT for one year of the last five years. I have lived here for three years as my PPR so cant work out why I have to pay for one year instead of two ?

Also what year do I choose and how do I calculate the gain for that relevant year ( 3 years ago ) ?

Do I use the percentage increase from the PTSB house price index tracker.

[broken link removed]

Can I offset legal costs of acquisition and disposal ? Can I offset any refurbishment costs I incurred when renting out the house ?

Practical numbers are as follows.....


Purchased 2003 - rented partially for 2003 and fully for 2004 - partially for 2005.

Purchase price 343000 - current valuation 500000. Am ready to sell.

Any assistance would be appreciated.

 

[Setanta12]

First bit of advice - get an accountant!

Secondly, read what posters above have said and then reread! You're asking more questions and its already answered.

Thirdly, the Revenue are also known to get their sums wrong (esp with CGT/CAT) but I think in this case they are attributing an extra year for you - reread Clubman's example above - he also takes that into account in his example.

Fourthly, you need to give us more details. Who owns the house - was it transferred under a marriage/separation agreement - does your ex-partner own a share or is entitled to proceeds ?

Re costs, your accountant as a basic rule will look at all rental expenditure and any costs that generally weren't allowed against rental profits are allowed as deductions - revenue versus capital chestnut of an argument here essentially - but thats only a general rule.

 

[danash]

First bit of advice - get an accountant!

Secondly, read what posters above have said and then reread! You're asking more questions and its already answered.

Thirdly, the Revenue are also known to get their sums wrong (esp with CGT/CAT) but I think in this case they are attributing an extra year for you - reread Clubman's example above - he also takes that into account in his example.

Fourthly, you need to give us more details. Who owns the house - was it transferred under a marriage/separation agreement - does your ex-partner own a share or is entitled to proceeds ?

Re costs, your accountant as a basic rule will look at all rental expenditure and any costs that generally weren't allowed against rental profits are allowed as deductions - revenue versus capital chestnut of an argument here essentially - but thats only a general rule.

I did read the answers...just dont understand them entirely.

Where does the extra year come from ?

What method of calculation do I use as the formulae above seem to blend the overall gains made into the time the house was rented - I should not have any liability for gains made during the time it was my PPR.

The house is currently in joint names and is about to be transferred into my sole name. The revenue web site is unclear as to the CGT treatment. My view is that this is a disposal of an asset as part of a separation agreement. However the section of the website says that there is no liability for CGT in the first year and after the first year there is no liability if the asset is transferred as part of a 'deed of separation'.

From the Revenue web site..

http://www.revenue.ie/en/personal/circumstances/separation-divorce.html#section15

Years following Separation

In the years following a separation further assets may be transferred between spouses without giving rise to any capital gains tax liability. Where this relief applies* each asset will be treated as being acquired at original cost and at the same time as the spouse who originally acquired it.
This exemption does not apply to assets which form or are intended to form part of the trading stock of a trade.
Any disposals from one spouse to the other which takes place after the year of separation or outside of a divorce/court order * are treated as disposals at full market value as if between strangers, and capital gains tax is calculated in the normal way.



* This relief applies where the assets are the subject of an order obtained under one of the following:

• Part II of the Judicial Separation and Family Law Reform Act
• Part II of the Family Law Act 1995
• Family Law (Divorce Act) 1996
• Deed of Separation

So to add another question - when does an informal separation agreement become a 'deed' of separation.

If I in fact have a deed of separation then I dont see any liability to CGT.


Sorry to make this longwinded.


As for the Accountant - last time I took their advice it cost me almost 10K in a missed tax liability so you understand why I am looking for multiple sources of clarification.