As Forensic Accountants, many of the instructions we take from solicitors, who use our services, relate to the delivery of a report on the tax implications of the disposal of properties within divorce proceedings.
This is perhaps a reflection of the fact that so many people have moved into the property rental market over the last few decades, seeking an attractive capital and income return.
Our task is essentially to produce the computation and advise on the Capital Gains Tax (CGT) exposure.
The computations can be complex. If we just take the Principal Private Residence (PPR), there was an expectation, until the recent past, that there would be no CGT exposure either on the sale of the former matrimonial home (FMH) or in the transfer of the interest from one party to the other in the divorce proceedings. The gradual reduction in the principal residence relief from thirty six months to just nine months is now exposing at least one of the parties to potential CGT where there is a more protracted delay between that party leaving the FMH and the sale or transfer being executed.
We have to consider whether one party has elected for another property to be their new Principal Private Residence. If not, there may be scope for continued protection, provided that the process can be played out in the right way.
It may be that the intention is that the sale is executed in the near future without any CGT exposure. Often we have to give an estimate of the date when exposure to CGT might start to crystalize. This is turn involves assumptions that the annual exemption is available to be utilised and some appreciation of the behaviour of the property market.
The computations also have to take into account the potential impact of Stamp Duty Land Tax (SDLT) in any transaction.
Frequently, instruction will involve other properties beside the FMH. These may be investment properties, acquired under buy to let or inherited. Some such properties may have been held for many years. Possibly they may have been the FMH at some point in time. They may also have been the PPR of one of the parties when first purchased, prior to marriage.
Often we have to look at a substantial property portfolio with multiple dwellings. We may be required in our instruction to advise on what properties might be sold or retained (and by whom) to achieve the optimum tax solution within the parameters of the divorce deal being hammered out.
Overseas and mixed use Property
We are also often confronted with property based abroad which requires liaison with colleagues in the International Association of Practicing Accounts to advise on the tax impact in the local jurisdiction.
Another variant can be where the property has mixed use, partly residential, partly commercial at varying times during the course of ownership.
In any Capital Gains Tax computation, one has to obtain all of the information for the computation. This will involve securing the initial cost (including professional fees), the cost of any enhancement work and then the cost of sale (quite often an estimate). Dates of acquisition and relevant expenditure are also needed meaning that the clients will need to provide some detailed information. We are able to provide a questionnaire to enable them to assemble this more easily. CGT computations of long held property can sometimes fall into the realms of the art of the possible. One sometimes has to be pragmatic, where the information record is less than complete.
The whole process has become more challenging by the egregious requirement to file an online report of the transaction within 30 days of completion and pay the estimated CGT, where there is such exposure. This has certainly added an extra dimension to the complexity, making any transfer of an interest in the PPR more involved if there is some CGT exposure. There can be a problem anyway with any CGT liability if a transfer is proposed which would trigger a liability without necessarily the potential cash to extinguish that liability.
In some cases, we are appointed by the individual, after referral by solicitors, where the parties want to try and settle things amicably without going through the Court process with all its stresses and expense. Lucy Orrow CTA TEP heads up this division of our forensic service offering. Lucy and her team of Forensic Accountants are constantly generating reports and computations for our legal friends and for clients. It is a systematised approach to minimise cost but without jeopardising our hard won reputation for quality, accuracy, diligence and proactivity.
Do get in touch with our expert team of Forensic Accountants if you have a situation where we can be of help.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.