England and Wales High Court (Family Division) Decisions

IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		9 April 2014

Mr Justice Holman:

1. At paragraph 155 of my judgment handed down on 28 February 2014, [2014] EWHC 502 (Fam), ("my judgment") I said that I intended by that judgment to express the outcome very broadly. At paragraph 168 I said that I expected the parties to work out cooperatively and by agreement the implementation of the details.
2. Since then, there has indeed been a period of considerable exchanges and negotiation and a great deal of detail has been agreed, or resolved by me during a very long hearing on Friday 4 April 2014. Essentially, only one matter now remains in issue upon which I was not prepared to give an immediate indication or ruling during the course of that hearing. This is my ruling upon that matter.
3. The agreed structure is that Victoria will purchase a property which she will lease to Frankie at a nominal or "peppercorn" rent, with elaborate and detailed provisions as to the terms of the lease. The property will belong at all times to Victoria (or her nominee in the event of her death). Frankie will have no proprietary interest in it at all. This is the structure which Victoria herself contends for, rather than a settlement or trust, or ownership by Frankie with a charge back to her.
4. For the reasons given in paragraphs 151 – 154 of my judgment I decided that there should be a "stepped approach" and that when the youngest child attains the age of 22, viz in about 20 years time in 2034, (or on earlier further order of the court) the first property should be sold and a less expensive property purchased, which will release some capital back to Victoria at that stage. Since Frankie will then be aged about 65, he should live well beyond that date. My judgment therefore contemplated, predicted, and intended, and the draft order now contemplates, predicts and intends, that there will be at least one sale and re-purchase. For convenience, and consistent with the terminology selected by all counsel in their evolving drafts of the order, I will call the property to be purchased for Frankie now "the property" and the property to be purchased after the contemplated step down "the alternative property". I will call the contemplated sale and purchase "the step down".
5. The issue which has now emerged is as to how the CGT which would arise upon the step down sale should be provided for and funded. I mention that the draft order includes a provision (currently paragraph E of the schedule, but the lettering may now have changed or may later change) to the effect that during the minority of any of the children Frankie may reasonably require the sale of the property and the purchase of an alternative property "should there be a relevant change of circumstances (in particular, but not limited to, a relocation by [Victoria] during the minority of any of the children)." This is to protect Frankie from being stuck in London if Victoria was to relocate with the children some significant distance away. It has been agreed that in that particular eventuality (which I will call "an unpredicted sale") the burden of the costs of sale and purchase and of any CGT or equivalent tax occasioned by the sale in question "shall be at large" – i.e. a matter for agreement or, if necessary, a ruling by the court at the time and in the circumstances as they then are. The present judgment has no bearing whatsoever on an unpredicted sale.
6. Upon the predicted, step down, sale a liability to CGT will, under present legislation, arise if there is, upon the sale price, any capital gain. The person liable to pay the tax will be Victoria since she is the owner of the sold property but it is not her principal private residence. The issue which has arisen is as follows. Mr Charles Howard QC contends on behalf of Victoria that in the order the expression "net proceeds of sale" should be defined as meaning "the gross proceeds of sale less any selling agent's fees, and the conveyancing costs of sale, and any tax including CGT occasioned by the sale". He contends that the net proceeds of sale as thus defined should then be applied as to 55 per cent in the purchase of the alternative property for occupation by Frankie, pursuant to paragraph 158 of my judgment, and as to 45 per cent received back (or more accurately, retained) by Victoria. On Mr Howard's approach the CGT would be paid as a "top slice" before apportionment so that, in effect, 45 per cent of the tax fell immediately upon Victoria and 55 per cent of the tax was paid out of the amount which would otherwise be invested in the alternative property for the use of Frankie. Mr Lewis Marks QC, on behalf of Frankie, contends that the whole of the CGT arising upon the step down sale should be borne by Victoria, as the liable tax payer, and that the 55 per cent to be reinvested in the alternative property should not be impacted.
7. Mr Howard frankly concedes that although there was discussion and submissions by both leading counsel during the main hearing as to the concept of a step down sale and purchase, or "trade down", neither leading counsel addressed the issue of CGT, and it appears that no one in the legal teams on either side thought about it; at any rate no one on Victoria's side, for otherwise they would surely have been addressed it. I have to say, frankly, that I did not have it in mind myself at the time of preparation of my judgment. Mr Howard urges, in particular, that at the time of the step down sale and purchase Victoria may have no liquidity with which to pay the whole of the CGT arising. In my view that is not correct unless, at that time, she had considerable other debts, as the following example illustrates. The current rate of CGT is 28 per cent. Assume that the base purchase price of the property is a precise £900,000. Assume that it is sold in 20 years for a price such that the net taxable gain (after all costs of sale) is £1 million. The total CGT would not exceed £280,000. Victoria would receive 45 per cent of the non taxed £900,000, viz £405,000, plus (before tax) £450,000 from the taxable gain, a total of £855,000. She would be liable to CGT of not more than £280,000 and should, therefore, have considerable liquidity out of which to pay it. Even after payment of the tax she would be left with £575,000.
8. In my view the CGT must in any event be borne in full by Victoria and not deducted from the 55 per cent to be applied in the purchase of the alternative property for the following reasons.
9. First, when I prepared my judgment I did not contemplate and intend that the 55 per cent of the net proceeds to be retained and reinvested in an alternative property for the use of Frankie should be reduced by CGT. I referred in paragraph 158 to "the net proceeds". When I personally use the expression "the net proceeds" (and I believe generally when it is used in the context of matrimonial litigation) without an express reference to CGT in the expression, I mean (and I believe it means) gross sale price less the immediate costs of effecting sale (viz estate agent's and legal costs and fees) and any amount required to redeem a charge upon the property, but not any CGT which may be assessed upon any gain, unless expressly referred to. I appreciate that, as the worked example in paragraph 7 above illustrates, the effect of Victoria having to pay all the CGT out of the 45 per cent portion of the pre tax net proceeds is that about 65 per cent of the proceeds net, not only of costs of sale but also of CGT, is expended upon the purchase of the alternative property for the use of Frankie, and only about 35 per cent received after tax in the hands of Victoria. That does not alter my decision, nor make it inconsistent with paragraph 158 of my judgment; because "the net proceeds" where that expression appears in paragraph 158 did not mean net of any CGT.
10. Second, as is clear from paragraph 158, my primary focus in fixing the percentages was upon ensuring that a sufficient sum remained available for the purchase (including purchase costs) of a new home for the use of Frankie. I assumed, ignoring inflation, that a net amount of around £450,000 should be sufficient; not £450,000 less a further deduction for CGT.
11. Third, the liability for any CGT will fall upon Victoria because it is she who desires to structure the order in such a way that she retains ownership of the property. Having regard to their respective age (he is currently 45, she is 37) and gender, Victoria is likely to survive Frankie by a number of years. Ultimately, therefore, the whole fund (less costs of sales and purchases) will revert to her, and the tax on any capital gains within it will be payable by her insofar as not already paid. The issue is not, therefore, as to whether she bears the CGT on the 55 per cent, for ultimately it is she must do so; rather, it is as to when. For the reasons already given, she must do so at the time of the step down sale (unless any kind of roll over is available, which was not canvassed before me last week).
12. I accordingly rule that in the draft order the expression "net proceeds of sale" means "the gross proceeds of sale less any selling agent's fees, and the conveyancing costs of the sale, but not any tax occasioned by the sale".