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Pension values can be
30% higher than the CETV.
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  Residential Property   "Dividing assets can result
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A divorce in a long standing marriage where the couple have accumulated many types of assets including investment properties, endowment policies, shares or investment bonds
can result in costs and extra taxes that may not have been realised in time, such as capital gains or life policy penalties.
  Introduction   Principal residence   Investment property

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In many parts of England & Wales and Scotland the pension arrangements could easily be the most valuable asset of a couple on divorce, judicial separation and nullity of marriage.

In the southeast of England it is usually the case that the largest asset class will be property, including the principal residence as well as other investment property.

Different orders can be applied to the matrimonial home by the court depending on the circumstances of the parties. The main consideration during ancillary relief proceedings will be the impact of capital gains tax (CGT), if any, arising from the disposal of capital assets. CGT was introduced in the Finance Act 1965 and the charging legislation was last codified in the Taxation of Chargeable Gains Act 1992.

For CGT purposes the term disposal will include any transfer of ownership or capital sum derived from the sale of an asset. Therefore a sale or gift either in absolute or by way of a trust or settlement and any exchange of property will be considered a disposal for CGT purposes.

Any disposals between spouses does not realise a chargeable gain on transfer. Only on the eventual sale of the property will the chargeable gain be realised and payable by the second spouse if the property is not exempt. The original acquisition cost by the first spouse will be used in the calculation as well as any indexation relief, taper relief including any taper relief of the second spouse.

Transfers between spouses can be rolled over only if the spouses are living together during the tax year. Any disposals between spouses on separation must occur in the same tax year. If the disposal is after the tax year of separation but before divorce, the gain may be taxable.

Principal residence
The most significant CGT exemption for most individuals will be the principal private residence. However, part of the gain on this property may be taxable if it has not been the principal residence for the whole of the period of ownership.

If in addition to the principal private residence the owner has a second home or a buy-to-let property, then this property will be subject to CGT on disposal. It is possible for an individual with two properties or more to make an election regarding the principal residence. This election must be made within 2 years of purchasing the additional properties and the decision can be changed so long as it is within the 2 year period.

For the purposes of CGT on the principle residence, there are periods of absence from this property that will not be liable to CGT, and these are as follows:

Any period of absence of time before 1 April 1982;
A period of absence of up to 1 year between the property being purchased and the owner officially taking residence;
Any period where the owner is absent that is job-related and accommodation is provided elsewhere, as long as the owner intends to return to the principal residence;
Any period of absence where the owner is working overseas as long as this period is preceded and followed by residence and no other property was the principal residence;
Periods of absence totaling up to 3 years as long as this period is preceded and followed by residence and no other property was the principal residence;
Any period of absence of up to 4 years in total where the owner is prevented from residence due to employment in another part of the UK as long as this period is preceded and followed by residence and no other property was the principal residence;
Prior to disposal, the last 3 years of ownership as long as the property has been used as the principal residence at some time before this period of absence.

There are situations where the principal residence will be partially exempt. For example, where part of the house is used exclusively for business purposes, that part will be subject to CGT on disposal. This will not apply where part of the principal residence is used some of the time for part-time work.

Furthermore, where the property has been purchased with the intention of making a gain, such as buying a house to be renovated for re-sale and not actually living in the property as a principal residence, then it will be subject to CGT on disposal.

Investment property
All investment property is subject to CGT on disposal. This includes property purchased with the intention to re-sell after it has been renovated, second properties such as holiday homes, inherited properties and buy-to-let properties.

The gain on disposal can be reduced by deducting from the disposal proceeds the acquisition costs as well as the associated costs of acquisition and disposal and any improvements. Furthermore the owner can applying indexation relief for property before 5 April 1998, taper relief from 6 April 1998 and their CGT exemption of £7,700 for the 2002 / 2003 tax year.

For example, a holiday cottage was purchased for £80,000 in October 1989 with legal costs of £400 and stamp duty of £800. The cottage was improved with an extension of £20,000 in June 1993 and sold in 2001 for £180,000. The indexation relief for the period June 1993 to April 1998 is 0.38 and for June 1993 to April 1998 is 0.15. The legal costs on sale are £600 and estate agent fees are £2,250.

Chargeable gain:
Disposal proceeds:
Less acquisition costs:
Indexation relief on acquisition:
(£80,000 x 0.38)
Less legal costs:
Indexation relief on legal costs:
(£400 x 0.38)
Less stamp duty:
Indexation relief on stamp duty:
(£800 x 0.38)
Less improvement costs:

Indexation relief on
improvement costs:
(£20,000 x 0.15)

Less legal costs on sale:
Less estate agent costs:
Total costs deducted:
Untapered gain:
Taper relief:
(3 years plus 1 year bonus)
Chargeable gain:
(£42,094 x 0.90)

The chargeable gain will be added to the owner's taxable income in order to determine the exact tax payable. Where the property is jointly owned the gain will be divided between the parties and the eventual capital gains tax payable will depend on their individual incomes plus the chargeable gain.
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