CGT issues in US-UK divorce

[Amaryllis]

After 40 years of marriage, my husband and I want to divorce, but my head is spinning as I am trying to work out the split of our assets. We own property in the US and the UK, and and he has pensions in both countries.

He is a dual UK-US citizen resident in the US, whereas I have been splitting my time between both countries. I have a Green Card, but I am retired and do not have any income in the US. We both pay taxes on our share of our rental property in the UK to HMRC, and he files a 'married filing jointly' return to the IRS.

My husband has a defined benefits pension from his past employment in the UK, and I am trying to figure out how to assess its cash-value. Do we need an actuarian for this, or is there a simpler/cheaper way? If the former, do I just pick someone based on a Google search, or is there something specific we need to look out for?

Regarding the jointly owned flat: I understand that he can transfer this to me while we are still married, or in the year of separation, without incurring any CGT liability. However, CGT would be charged if the transfer occurs after the end of the tax year in which we separate. Is this correct?

But how is separation defined? As far as HMRC are concerned, we have been 'married but living separately' for several years - so how do we prove that, until recently, ours was nevertheless an ongoing and viable marriage? Do we even need to prove this?

Is there is anything else we need to bear in mind? I am feeling a bit lost and would be grateful for any kind of information that might be useful.

Moderator Message:
Moved to Taxes [leaving a link] - Chris

[dspp]

A couple of comments based on personal experience of similar.

Do you know which jurisdiction you will be divorcing in ? Are there any children ? Knowing this helps us all help you.

For the pension, any UK pension provider will issue a letter setting out the Cash Equivalent transfer Value (CETV). You must specify that you are asking for this CETV in order to carry out divorce calcs. I think that the (ex)employee needs to do the asking, i.e. your husband. When I did this one of my pensions was non-UK and the non-UK pension was also able to issue a CETV which made things easier. They do all the sums, you don't need to hire your own actuary.

A UK court can only (easily) put a pensions sharing order on a UK pension. Therefore the UK court may prefer to imposer a pension sharing order on the UK pensions only, but to set it higher so as to compensate for the non-UK pensions. This is what the judge did in my case, but judges of course are capable of doing almost anything.

It ought to be possible to work through this on your own without needing to employ specialist advice. At least that was my experience.

regards, dspp

[PinkDalek]

…

Regarding the jointly owned flat: I understand that he can transfer this to me while we are still married, or in the year of separation, without incurring any CGT liability. However, CGT would be charged if the transfer occurs after the end of the tax year in which we separate. Is this correct?

But how is separation defined? As far as HMRC are concerned, we have been 'married but living separately' for several years - so how do we prove that, until recently, ours was nevertheless an ongoing and viable marriage? Do we even need to prove this?

...

Have you studied this for starters?:

https://www.gov.uk/government/publicati ... ation-2018

In particular from section 3 onwards:

3. What counts as ‘living together’

You and your spouse or civil partner are treated as living together unless you’re separated:

under a court order
by a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed)
in such circumstances that the separation is likely to be permanent

In each case the marriage or civil partnership must have broken down. If the marriage or civil partnership hasn’t broken down but the 2 of you don’t live in the same house, you’re still treated as living together for CGT purposes. ...

[9873210]

As a green card holder you are a US person and by US law are taxed by the US.

You said that you do not have any US income but this is irrelevant. As a green card holder you owe US taxes on your world wide income. You said your husband filed a US tax return "married filing jointly", this is not correct. Any joint return was filed by your husband and you, and should have included your worldwide income and have been signed by you.

US tax laws regarding capital gains, transfer of property between spouses (or ex spouses) fully apply to you. If you want to comply with these they could strongly effect the nature and timing of any settlement. That would require specialized advice

[Lootman]

As a green card holder you are a US person and by US law are taxed by the US. You said that you do not have any US income but this is irrelevant. As a green card holder you owe US taxes on your world wide income.

I was under the impression that, although a green card signifies permanent residence status, that "permanence" is a right but not an obligation.

Meaning that a green card can be rescinded or given up if the alien ceases to live in the United States. In fact I believe that the US immigration authorities will retract your green card if you fail to follow its rules. The most important rule being that you continue to reside in the US.

So a green card may not be the permanent death sentence that you describe. From a tax perspective, being a US citizen and being a green card holder are distinct. US Citizens are taxed on world-wide income but green card holders may or may not be, depending on their residence. Another difference is that the foreign-resident spouse of a green card holder may not be liable for US tax on her non-US income nor have to declare it.

Note: the above is all based on when I was researching this when my (American) wife wanted us to move there. In the end we didn't so it was moot, but these same issues concerned me at the time.

[TedSwippet]

As a green card holder you are a US person and by US law are taxed by the US. You said that you do not have any US income but this is irrelevant. As a green card holder you owe US taxes on your world wide income.

...
So a green card may not be the permanent death sentence that you describe. From a tax perspective, being a US citizen and being a green card holder are distinct. US Citizens are taxed on world-wide income but green card holders may or may not be, depending on their residence.

9873210 is pretty much correct. A US green card is not quite a permanent fiscal death sentence, but it is close, and there is very little difference between a US citizen and a green card holder when it comes to US tax, no matter where they live on (or off) the planet. Lexology explains:

Unlike other non-resident aliens, green card holders are tax residents regardless of how many days are spent in the U.S. Continuing to hold a green card creates a continuing U.S. tax obligation regardless of immigration status. The mere fact that the U.S. Citizenship and Immigration Services (“USCIS”) no longer recognizes the validity of a green card because of a prolonged absence does not end U.S. tax obligations. A prolonged absence from the U.S. will not necessarily result in a change of status for federal tax purposes. An expired green card will also not relieve the holder of his or her obligation to comply with U.S. tax laws; the holder’s permanent resident status is deemed to continue unless such status is rescinded or administratively or judicially determined to be abandoned.

In other words, it may not be all that 'permanent' for residency purposes, but it is a lot more 'permanent' for tax purposes, and the two are not at all tightly coupled. For tax purposes, a green card is very sticky and hard to rid oneself of (form I-407 needed).

The largest problems for US taxpayers living in the UK come from ISAs (simply not US tax free), pensions (murky US tax treatment), sale of residence (not fully tax free in the US), capital gains (the US has no annual CGT allowance), and holding any non-US domiciled mutual funds or ETFs (including in an ISA, google "PFIC" and weep).

[fegger]

In divorce it is likely that a defined benefit pension would be more highly valued by an actuary. It is what most solicitors would advise

It would be much more advantageous for you. Employers normally undervalue DB pensions for a variety of reasons These are complex and you could find out more by googling.

Warning I went through a divorce with very complex issues in it and the judge got fed up and eventually discarded the actuary views and went on the CETV. It was very disadvantageous to me but could do nothing about it.