A Marital Problem

Chris Stedman
Senior Partner
July 28, 2023
5 minutes

Richard and Jennifer are in their early 70s. They own and live in their family home which is worth £1.5 million. The sale of the property would realise a significant gain. This would not be a problem because principal private residence (PPR) relief will exempt any gain no matter what happens. Or will it...?

Sadly Jennifer's mental health has deteriorated and two years ago she had to be put in permanent hospital care. Richard is thinking of selling the house, moving to a flat and making a gift of the excess funds to the two adult children of the marriage. He senses that there may be a few problems ahead and goes to see his solicitor.

Thankfully Richard's solicitor has a pretty good grasp of tax issues as well as the legal code. He explained that in a normal situation where husband and wife are living together they will each be entitled to PPR relief on the sale of the family home. He explained that "living together" had a statutory definition for capital gains tax purposes which is as follows:

A married couple are treated as living together unless:

(i) They are separated under an order of court;

(ii) They are separated by a formal deed of separation; or

(iii) They are in fact separated in such circumstances that the separation is likely to be permanent.

The solicitor continued.... "Clearly (i) and (ii) are not in point but in all the circumstances, Richard, would you say that the present separation is likely to be permanent?"

Richard's response was immediate. "Not at all," he declared with warmth. "Jenny has looked after me all her married life. Do you think I'm going to desert her now? I visit her every day. I attend to any personal needs she may have. We have a walk together if the weather is fine. I'm committed to her care."

The solicitor smiled. "You've convinced me, Richard," he said, "and together we will be able to convince HMRC that you should be regarded as living together for CGT purposes, if necessary." He went on to explain that in any event the final 36 months of ownership would be covered by PPR for someone in long-term care. This compares to 9 months for those not covered by the special exemption.

He then explained that there were practical difficulties in selling the property or gifting an interest in the property by someone lacking capacity. Richard, as Jenny's attorney, had no power to act without the sanction of the Court of Protection. The Court would have to be satisfied that any application made to it was in Jennifer's best interests based on statutory criteria.

"There is another aspect to consider," he continued. "If you were successful in selling the property, Jenny's share of the net proceeds would be ring fenced and have to be used solely for her care. You can be quite sure that Social Services would declare an interest and seek to recover part or all of the costs of her care. At the moment they can't touch the house because you are still living there."

"There is a further aspect to all this," he added. "Even if you were able to sell the house and realise excess funds for the benefit of your children, do bear in mind that to be effective for IHT purposes you would need to outlive any gifts by seven complete years."

"Oh and by the way," the solicitor concluded, "Don't forget that gifts out of surplus income are quite exempt from IHT. They will keep your children and grandchildren happy for the time being. There are a few simple conditions that we can go into another time, if you're interested."

C&H Stedman will be pleased to advise further on tax and other issues arising.

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