Constructive trust prevented CGT liability

In Abigail Wilmore v HMRC [2023] TC08959, the First Tier Tribunal (FTT) found that a divorcing couple’s agreement over the division of properties had created a constructive trust. This amounted to a disposal for Capital Gains Tax purposes, allowing no gain/no loss treatment to apply.

• Ms Wilmore, and her husband, Mr Cohen, purchased a Residential property (Thornfield) in April/May 2015, with a view to it becoming their Main residence after extensive renovations had been carried out.
• In order to acquire Thornfield, the couple’s existing residence (Ravenshurst) was remortgaged to release equity. A mortgage on Thornfield was also raised based on Ms Wilmore’s income.
  • Ravenshurst had been purchased with a deposit from both Ms Wilmore and Mr Cohen, but it was in Ms Wilmore’s sole name and her income that allowed the mortgage to be obtained.
• On 10 September 2015, Ms Wilmore and Mr Cohen Separated.
  • Mr Cohen moved into Thornfield, which was still under renovation.
  • Ms Wilmore continued to live in Ravenshurst.
• Correspondence between Ms Wilmore and her divorce solicitors in December 2015 indicated that she and Mr Cohen had agreed that he would take ownership of Thornfield and she would retain Ravenshurst.
  • At the same time, Ms Wilmore stopped contributing to the mortgage for Thornfield.
• A draft petition was sent to Mr Cohen on 4 April 2016 on these terms, with a lump sum payment of £75,000 being due under it to Ms Wilmore.
  • In June 2016, this lump sum payment was amended to £35,000.
• The consent order was sealed by the Family Court on 17 October 2016 and took effect from the Decree Absolute on 23 December 2016. 
  • This provided for the £35,000 lump sum payment to be made when Ms Wilmore’s interest in Thornfield was transferred to Mr Cohen, on or before 31 August 2016.
• Thornfield was sold in September 2016 and the mortgage in joint names was redeemed.
• In November 2020, HMRC issued Ms Wilmore with a Discovery assessment for £14,377, representing Capital Gains Tax (CGT) on the disposal of her half share in Thornfield in 2016-17.
• Ms Wilmore Appealed to the First Tier Tribunal (FTT).

The FTT found that:

• Due to the agreement made by Ms Wilmore and Mr Cohen in December 2015, Ms Wilmore had transferred her beneficial interest in Thornfield, to Mr Cohen, at that time.
  • Mr Cohen had the full benefit and enjoyment of Thornfield.
  • Ms Wilmore did not occupy Thornfield; she did not take part in decision-making (e.g. regarding renovations or in respect of its sale); she did not share the costs or benefits of renovations and she received no proceeds from its sale.
• As a result of the December 2015 agreement, a Constructive trust arose under which Ms Wilmore retained her legal ownership of Thornfield as trustee.
  • There was a common intention and mutual understanding between the parties. These were key requirements for a constructive trust to exist.
• As the disposal of Ms Wilmore’s beneficial interest in Thornfield occurred during the tax year of separation, no gain/no loss treatment for CGT purposes applied.
• While some financial aspects of the divorce had not been agreed upon as of December 2015, these did not impact the position of Thornfield. There had been an agreement in respect of the properties.
• The consent order being sealed in October 2016, and its 31 August 2016 backstop date in respect of the transfer of Thornfield to Mr Cohen, were unimportant.
  • By its nature, a consent order is preceded by an agreement reached between the parties, in this case in December 2015. Such an agreement is not made by the court.
• The lump sum order and payment were not tied to Ms Wilmore transferring her beneficial interest in Thornfield to Mr Cohen. These were designed to recognise Ms Wilmore’s greater financial contributions to the marriage.

The appeal was allowed.

Comment

For disposals on or after 6 April 2023, the CGT no gain/no loss window is extended for transfers in connection with a divorce. The rules now apply beyond the end of the tax year of separation.

Under the Post-6 April 2023 rules, the position for Ms Wilmore and Mr Cohen would have been much simpler.

Useful guides on this topic

Divorce & Separation: Toolkit
A summary of the tax implications which can arise on divorce and separation. 

Residential Property gains
The definition of 'Residential Property' is important for Capital Gains Tax (CGT) purposes when considering how a gain is reported, when tax is paid and the rates of tax that apply. What is a Residential Property gain? 

Rollover Relief: Exchanges of joint interests in land
This guide outlines the form of Capital Gains Tax (CGT) Rollover Relief available for exchanges of joint interests in land. 

Acting for a trust? Start here…
This is an essential guide for advisers and trustees on how to manage the tax affairs of a UK trust and how to avoid common pitfalls. 

PRR: Private Residence Relief
What is Private Residence relief (PRR)? What are the qualifying conditions? Can you claim relief on two homes? How do you claim PRR? Can you claim PRR if you develop your garden?

External link

Abigail Wilmore v HMRC [2023] TC08959