Case No. ZZ20D65691

63.It is agreed that there is latent US capital gains tax on the Southampton residence (Meadow Lane (1)) in the sum of $5,052,000 and on the Miami penthouse in the sum of $897,000.64.The husband argues that in accordance with authority and convention, these latent taxes should be allowed when calculating the net proceeds of sale which will be shared with the wife when calculating her entitlement under the PNA. The wife argues that this is completely unreal because the husband will never pay such taxes, not least because he has millions of dollars of unused losses which he will be able to apply to extinguish the tax liability were he ever to sell the properties. The husband’s response is that a tax loss is no different from cash in the bank. Money is fungible, and it can take many shapes and forms. His tax loss is an asset, a chose in action, just as real as a piece of property or money in the bank. The PNA does not require him to use cash to reduce debt on properties, and so by parity of reasoning he should not be required to use an asset, namely a tax loss, to reduce a specific debt on the two properties namely latent taxes.65.In White v White [2001] 1 AC 596, Lord Nicholls stated at 612:“Finally, Mrs White criticised the use of net values, arrived at after deducting estimates of the costs and capital gains tax likely to be incurred if the farms were sold. Mr White still owns and uses the farms. The farms have not been sold. Counsel submitted that the use of net values in this situation should be discontinued. I do not agree. As with so much else in this field, there can be no hard and fast rule, either way. When making a comparison it is important to compare like with like, so far as this may be possible in the particular case. In the present case a comparison based on net values is fairer than would be a comparison of Mrs White' cash award and the gross value of the farms. Under her award Mrs White will have money. She can invest or use it as she pleases. Mr White's equivalent, as a cash sum, is the net value of the farms. The farms have to be sold before he can have money to invest or use in other ways. What will be his financial position if he is able to retain the farms or parts of them? Will he better off financially? Dairy farming is currently languishing in the doldrums. On the evidence there is no reason to suppose that the farms are likely to yield a better financial return at present than the investment return to be expected if Mr White sold up and invested the net proceeds.”66.From this dictum a convention has arisen whereby latent tax which cannot be avoided, and which will likely be payable when a property is sold, is almost invariably deducted when computing the value of a property to go on the asset schedule. For example, in DR v GR & Ors (Financial Remedy: Variation of Overseas Trust) [2013] EWHC 1196 (Fam) at [50](iv) I stated:“Fourth, the figure for capital gains tax presupposes a distribution of all the assets to the beneficiaries. Although the normal rule as stated in White v White [2001] 1 AC 596 is that latent capital gains tax should be allowed the court must nonetheless be realistic. I consider it reasonable to allow this latent sum but I will bear in mind that it may be a long time before any such tax is paid by the husband (or anyone else) and that in the meantime the husband will continue to have the use of the assets.”67. However, in K v L [2010] EWHC 1234 (Fam) [2010] 2 FLR 1467 Bodey J held:“57.Mr. Pointer's submission is that latent CGT (estimated at over £10 million, mostly in respect of the S Ltd shares) should not be taken off the gross value of the assets. This is because the shares are held offshore and as he (rightly) submits they need never be brought onshore, thus attracting CGT. The wife accepted this in cross-examination. She can readily meet her claimed outgoings as per paragraph 30 above out of the S Ltd dividends remitted into this country and subjected to tax here, without touching the capital. Further, the wife told me in terms of her wish and intention to leave the shares to the children, just as they originally came to her. She has no significant capital needs, as she is completely content with her present home, which has quite recently been fully renovated.58.Miss Stone submits that CGT should clearly be taken off, as is the entirely conventional practice in these cases. This is because the wife should be entitled to access her resources how she likes, as and when she might wish to do so. That includes remitting the proceeds to this jurisdiction, in which case she would have to pay CGT. So the only way to compare like with like is by the use of 'after CGT' figures across the board.59.Clearly it is forensically advantageous to the wife for the gross value of the assets to be reduced by the incidence of the latent CGT (and by taking the date of separation to value the shares) because the husband's award would represent a greater proportion of the whole. Conversely, it is forensically advantageous for the husband for latent CGT not to be taken into account (and for the shares to be taken at today's value) as his award would then represent a correspondingly smaller proportion. Lord Nicholls dealt with the CGT point in White v. White above, when he said:"Counsel submitted that the use of net values in this situation should be discontinued. I do not agree. As with so much else in this field, there can be no hard and fast rule, either way. When making a comparison it is important to compare like with like, so far as this may be possible in the particular case."60.Given the wife's clear evidence about her wishes and intentions regarding the S Ltd shares, coupled with the modest way in which she has lived for her entire life, I agree with Mr. Pointer that the likelihood of her ever actually having to pay out significant amounts of CGT on them is a very modest one. It would require a volte-face in respect of both her stated intentions and her historic lifestyle. Accordingly, if this issue were an important one (which I do not think it is) I would not be inclined to deduct CGT on the entirety of the wife's holding. Equally, however, in the fullness of time and as things turn out, she may wish to bring some of her fortune into this jurisdiction, as she has done on some occasions in the past, thus attracting CGT on the proportion remitted. There is no way of anticipating this in any informed way. So taking a broad brush, I would deduct latent CGT on an arbitrary £10 million worth of her shareholding, but would not deduct it from the balance of the share holding. I consider that this discretionary although speculative approach is open to me, as there is 'no hard and fast rule' and because I think it is the best way to produce a fair and realistic determination on the issue, given the unusual facts of this particular case. The gross kitty therefore reduces in size accordingly.”68.I made similar comments in BJ v MJ (Financial Remedy: Overseas Trusts) [2011] EWHC 2708 (Fam), [2012] 1 FLR 667 where I said:“69This list does not include the asset and liability referable to C's business referred to above at para 30. Nor does it include, contrary to Mr Castle's arguments, the tax that H would pay were he to receive all the assets and remit them here. This is completely unreal. The whole point of the structure is to avoid paying tax, and H has never remitted any offshore income. Mr Castle argues that not to include it would result in an unfair imbalance as W would be able to remit onshore and would therefore have more freedom with, or at least fewer strings attached to, her money. But in order to have the benefit of the money here H does not need to remit income.”69.In my judgment the usual convention should apply here. This is not a case where the court is blinding itself to a truth that a party will never pay such latent tax because he has entered into arrangements the whole object of which is to avoid paying that very tax. In this case the taxes are very real, and the husband will have to pay them with money or with other assets in the shape of tax losses. The wife would be given very short shrift if she suggested that the calculation of the net value of these two properties should ignore the latent taxes because the husband has money in the bank and could just pay off the taxes. I agree with Mr Chamberlayne KC that there is no difference in principle or substance between the husband paying a tax debt in cash or eliminating it by deploying a loss.70.Accordingly, I take the above latent tax figures of $5,052,000 and $897,000 into account in my calculations. The result is that the Outcome Schedule will show the net proceeds of the Southampton residence to be $16,542,500, of which the wife is entitled to half - $8,271,250 - under the PNA. And it will show the net proceeds of the Miami penthouse to be $4,654,842, of which the wife is also entitled to half or $2,327,421.71.Following circulation of this judgment in draft I have been informed by junior counsel for the wife that the Outcome Schedule failed to reflect costs of sale and latent tax on two properties to be retained by the wife namely an apartment in New York and Rue Duphot (1). I have now been given the omitted figures. It has not been explained to me why the Outcome Schedule was wrong. Nevertheless, there is no reason to believe that the new information is inaccurate and I have therefore adjusted the Outcome Schedule to show the correct net value of those two properties.