My husband and I have decided to divorce. It’s all very amicable but as part of our joint estate we own a house in Spain which we are now looking to sell.
The house is valued at €300,000. We’re unclear as to what the tax implications are for us once the money from the sale comes through.
In particular, should we be concerned about any taxes or liabilities we will have to pay in Spain? We are both in full time work.
Family lawyers often see an increased number of divorce enquiries following Christmas
Camilla Wallace, Head of Private Client Group, Wedlake Bell, replies: I was sorry to read of your intention to split – family lawyers often see an increased number of enquiries at this time of year following the strain at Christmas.
In legal and tax terms the timing is unfortunate as it leads to private client lawyers giving tax advice on the impact of a relationship coming to an end in a somewhat hasty fashion ahead of the end of the tax year on 5 April.
Ideally couples would separate on or shortly after 6 April to give themselves a full year to arrange their affairs but life (relationships) do not breakdown like that.
In your case the key consideration is the liability you face for Capital Gains Tax.
The tax year runs from 6 April to 5 April and UK resident and domiciled individuals who are taxed on the ‘arising basis’, i.e. on worldwide income and gains, will have an annual exemption available to them for capital gains tax.
Capital gains are taxed on top of an individual’s income at rates of 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers, although gains on residential property are taxed at 18 per cent and 28 per cent respectively.
Camilla Wallace, of law firm Wedlake Bell
You don’t mention your income but a person is a basic rate taxpayer if they receive £50,000 or less of income during the tax year; the higher rate band is between £50,001 and £150,000 and anything above that classifies as the additional rate.
Now, CGT is triggered on the disposal of an asset such as a property including on a gift or a sale.
The exception is that a gift or transfer between spouses is deemed to take place on a ‘no loss/no gain’ basis; the purpose being that married couples should be allowed to arrange their affairs as they wish.
However, a divorcing couple need to be careful because the standard ‘no loss/no gain’ rule will only apply if they have actually lived together during the tax year in which the asset is transferred.
If assets are transferred between individuals who are already divorced, had their civil partnership dissolved, or separated in an earlier tax year, CGT will be in point and a valuation of the asset as at the date of transfer will be required to work out the gain or loss.
However, why am I mentioning transfers between spouses when the issue here is tax on a sale to a third party?
If assets are transferred between individuals who are already divorced CGT rules will apply
That is because the disposal of a second property, such as your Spanish villa, falls within the scope of CGT.
How do we limit the tax we will have to pay?
To mitigate CGT, which will certainly arise on the sale to the third party, you both might wish to take advantage of a spouse’s annual exemption or lower rates of tax. This can be achieved by an ‘intra-spouse transfer’ in the year of separation.
Although this is quite common with second homes in the UK, the issue here is how the Spanish tax authorities would view a transfer ahead of a sale.
If you let out a second home, capital gains tax rules are about to change
What is known as ‘Private Residence Relief’ is about to be changed.
Currently, homeowners who previously lived in a property but went on to let it out can claim capital gains tax relief on property sales for up to 18 months after they move out.
From April next year this will be reduced to nine months.
The tax grab is expected to raise £470million for the Treasury over five years.
Local tax advice will need to be obtained – notably not just at national level but also at ‘state’ level. Depending on how the transfer is made, Spanish gift tax might be triggered by the transfer to the spouse and accelerate a tax charge in Spain.
The UK tax charge on a subsequent disposal would be then be denied relief under the UK/Spanish Double Taxation Agreement.
If tax arises in both jurisdictions on the same transaction then the treaty works to ensure that there is no double taxation, albeit usually the highest rate of tax is paid.
In Spain the CGT rate is slabbed with tranches at 19 per cent, 21 per cent and 23 per cent. They also have a ‘plusvalia tax’ (imposed by the local town hall) on the value of the land and the buyer will withhold 3 per cent income tax on the proceeds where a non-resident is selling, although a refund/CGT offsetting mechanism is available.
That said the Spanish tax authorities are notoriously slow and refunds can take 12 months to process.
Both jurisdictions permit deductions such as costs of acquisition (purchase price, lawyers’ fees, SDLT/equivalent etc.) and costs of disposal (lawyers’ fees, marketing/estate agent’s fees etc) as well as the cost of capital improvement (so long as the value of such work is still reflected in the property’s value at the point of disposal).
For example, should the kitchen be replaced twice in Year 1 and again in Year 8 prior to sale – only the cost of the second kitchen would be permitted as a deduction for CGT.
The local tax adviser in Spain can set out specifically what would be permitted to offset the gain there but if any building works have been carried out without the proper licences, as sometimes happens in Spain, then it will be harder to claim such expenditure.
Any tax paid there would credit some or all of the liability in the UK depending on the tax profile of the individual.
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