Tax Tribunal allows taxpayer's appeal against discovery assessment

In Abigail Wilmore v HMRC [2023] TC08959, the First-tier Tribunal (FTT) allowed a taxpayer's appeal confirming that an agreement between separating spouses over the division of properties had created a constructive trust which resulted in a disposal for Capital Gains Tax (CGT) purposes, allowing no gain/no loss treatment to apply pursuant to section 58, Taxation of Chargeable Gains Act 1992 (TCGA).

Background

Ms Wilmore and Mr Cohen married in 2012. In April/May 2015, Ms Wilmore and Mr Cohen, purchased a property called Thornfield, with a view to it becoming their main home after it had been renovated. In order to buy Thornfield, equity was released via a remortgage of the couple’s existing residence known as Ravenshurst and a mortgage was also taken out on Thornfield based solely on Ms Wilmore’s income. Both Ms Wilmore and Mr Cohen had contributed to the deposit which was paid in respect of Ravenshurst, but the property was in Ms Wilmore’s sole name and it was her income that enabled the mortgage to be obtained by the couple. 

Ms Wilmore worked as an HR Director in the fashion industry and her ‘high paying job’ was the main source of income for the couple for most of their time together before they married. In 2010, Mr Cohen started a property development business with a partner. Ms Wilmore supported Mr Cohen’s business venture initially by helping him to obtain two mortgages using her salary. Mr Cohen’s property business was profitable, and he was able to obtain mortgages in respect of further properties for his business without financial assistance from Ms Wilmore, who did not share any of the profits derived from Mr Cohen’s business.

In September 2015, Ms Wilmore and Mr Cohen separated. During the separation, Mr Cohen moved into Thornfield, which was still being renovated and Ms Wilmore continued to live in Ravenshurst. During the divorce proceedings, it was eventually agreed that Mr Cohen would take ownership of Thornfield and Ms Wilmore would retain Ravenshurst. A consent order was agreed between the couple and sealed by the Family Court on 17 October 2016, which took effect from decree absolute on 23 December 2016. Under the terms of the order, Mr Cohen was to transfer a £35,000 lump sum payment to Ms Wilmore when Ms Wilmore’s interest in Thornfield was transferred to Mr Cohen on or before 31 August 2016. Thornfield was later sold in September 2016 and the mortgage (which was in joint names) was redeemed.

In November 2020, HMRC issued Ms Wilmore with a discovery assessment, pursuant to section 29, Taxes Management Act 1970 (TMA), in the sum of £14,377, representing CGT on the disposal of her half share in Thornfield in the 2016/17 tax year. Ms Wilmore appealed the asessment to the FTT.

FTT decision 

The appeal was allowed. 

The key issue for the FTT to determine was whether Ms Wilmore’s beneficial interest in Thornfield was transferred to Mr Cohen by 5 April 2016, in order for section 58, TCGA, to apply to treat the transfer on a no gain no loss basis for CGT purposes. 

Section 58(1), TCGA, provided as follows:

"58 Spouses and civil partners

(1) If, in any year of assessment, –

(a) an individual is living with his spouse or civil partner, and

(b) one of them disposes of an asset to the other,

both shall be treated as if the asset was acquired from the one making the disposal for a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal."

Ms Cohen argued that her beneficial interest in Thornfield was transferred to Mr Cohen in December 2015. HMRC’s case was that Ms Wilmore did not transfer her beneficial interest in Thornfield to Mr Cohen until after 5 April 2016, by which time she was already separated from Mr Cohen. 

The FTT found that as a result of the agreement made by Ms Wilmore and Mr Cohen in respect of the two properties 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, for example, regarding renovations or in respect of its sale; she did not share the costs or benefits of renovation works and she received no proceeds from the sale of the property. As a result of the agreement, a constructive trust had arisen under which Ms Wilmore retained her legal ownership of Thornfield as trustee. There was a common intention and mutual understanding between the parties which 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, a no gain/no loss treatment for CGT purposes applied. While some financial aspects of the divorce had not been agreed upon as at December 2015, these did not impact the position of Thornfield. In the view of the FTT, there had been an agreement between Ms Wilmore and Mr Cohen in respect of the two properties.

The FTT commented that the fact that the consent order was not sealed until October 2016, and the fact that there was a backstop date in respect of the transfer of Thornfield to Mr Cohen of 31 August 2016, were not determinative. By its nature, a consent order is preceded by an agreement reached between the parties (not the court). In this case the agreement was made between Ms Wilmore and Mr Cohen in December 2015. Further, the lump sum order and payment were not tied to Ms Wilmore transferring her beneficial interest in Thornfield to Mr Cohen. These were instead designed to recognise Ms Wilmore’s greater financial contributions to the marriage.

Comment

This decision is only likely to be of assistance to anyone who may have found themselves in a similar position to Ms Wilmore before 6 April 2023. 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.

Interestingly in this case, the FTT raised potential concerns over the validity of HMRC's discovery assessment that was issued to Ms Wilmore for the recovery of the alleged CGT in respect of the disposal of Thornfield. However, as Ms Wilmore raised no challenge to the validity of the discovery assessment, the FTT did not fully consider this issue in its decision although it did comment that:

"… If we had not been able to determine the appeal on the substantive issue in favour of the appellant, we would have needed to be satisfied that HMRC have met the initial burden as respects the validity of the discovery assessment". 

In the event of an onward appeal by HMRC, the FTT noted in its decision that it had not heard submissions from the parties on this point.  

The decision can be viewed here.