Luckwell v Limata

Where a property settlement provides for a future sale and replacement property, the court must give effect to the intended meaning of the order’s financial terms. Unless expressly stated otherwise, “net proceeds of sale” means the gross sale price less the immediate costs of sale and any charge secured on the property. It does not include capital gains tax. Where the owner retains legal ownership and is liable for capital gains tax, that liability falls on the owner and must not reduce the fund earmarked for the replacement property, unless the order provides otherwise. A future sale arising from an unforeseen change of circumstances may be treated separately according to the circumstances then existing.

The ruling concerned the implementation of an earlier financial remedy judgment in matrimonial proceedings. The agreed structure required the wife to purchase and retain ownership of a property, which the husband would occupy under a lease at a nominal rent. When the youngest child reached 22, the property was intended to be sold and replaced with a less expensive property for the husband’s occupation.

The parties disagreed about the treatment of capital gains tax arising on that predicted sale. The wife contended that the tax should be deducted from the net sale proceeds before the proceeds were divided, reducing the amount reinvested in the replacement property. The husband contended that the wife should bear the tax in full. The issue was the proper meaning of “net proceeds of sale” in the earlier judgment and draft order.

1. The court ruled that capital gains tax arising on the predicted step-down sale must be borne in full by the wife. It must not be deducted from the 55 per cent of the proceeds intended for the purchase of the alternative property.

2. The earlier judgment, reported at [2014] EWHC 502 (Fam), had referred to “the net proceeds” without expressly mentioning capital gains tax. In that context, the expression meant the gross sale price less the immediate costs of effecting the sale, including estate-agent and legal costs and any amount required to redeem a charge. It did not mean proceeds net of capital gains tax.

3. The construction was supported by the purpose of the original percentage allocation. The primary focus had been to ensure that sufficient capital remained available to purchase a suitable replacement home for the husband. The court had assumed that approximately £450,000 would be required, without a further deduction for capital gains tax.

4. The tax liability also properly fell on the wife because she had chosen to retain ownership of the property. The issue was therefore one of timing, rather than ultimate incidence: she would ultimately bear the tax on the capital gain. She had not shown that payment from her share of the proceeds would necessarily create a liquidity problem.

5. The ruling concerned only the predicted step-down sale. An unpredicted sale caused by a relevant change of circumstances during the children’s minority remained subject to the agreed provision that the costs and any tax would be determined by agreement or, if necessary, by the court at the time.

6. The draft order was directed to provide that “net proceeds of sale” meant the gross proceeds less selling-agent fees and conveyancing costs of sale, but not any tax occasioned by the sale.

The ruling was made in the course of implementing the court’s earlier financial remedy judgment, [2014] EWHC 502 (Fam). It was not an appeal from that judgment.