If a gift of a property (or share of a property) is made or a property is sold at less than its market value, capital gains tax (CGT) is charged as if the donor had received the market value in cash.
This ruling does not apply to transfers (gifts) between spouses/ civil partnerships. In such a situation, the donee is treated as having acquired the property at the date of the transaction on a ‘no gain/no loss’ basis, and most importantly, at the original purchase price.
No CGT will be due until the receiving spouse/civil partner sells the property. The transfer must be an outright gift with no conditions attached.
There is nothing to stop the receiving spouse from returning the gift at a later date. However, care needs to be taken in the planning as such transfers could be challenged by HMRC under the Ramsay anti-avoidance principal which broadly enables the courts to look behind the individual steps of a transaction to ascertain the legal nature of a series of transactions as a whole.
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Market value less original price
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£100,000
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Annual Exemption 2019/2020
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£(12,000)
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Chargeable Gain
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£88,000
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Tax due @ 28%
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£24,640
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However, there will be a practical problem in that no monies will have been received out of which to pay the CGT. If Joe had gifted the property to his wife no CGT would be due on transfer, but should his wife subsequently sell the property, the base value would be the original cost of £150,000.
Gift Of PPR To Spouse/Civil Partner
Where there is an inter-spouse/civil partner transfer of a principal private residence (PPR), the donee is still treated as having acquired the property at the donor’s base cost but with one added twist – the donee’s period of ownership is deemed to commence not at the date of transfer but instead at the date of the original acquisition by the donor.
Furthermore, any period during which the property was the main residence of the donor will also be deemed to be that of the donee such that the transaction is backdated.
This is only relevant to properties that are (or have been nominated as) the main PPR.
Gift Of PPR To Spouse/Civil Partners
Joe purchases property 1 in his sole name as a main residence. A few years later he marries Jane, moves into property 2 and lets out property 1. Ten years later there is a large capital gain accruing on property
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Joe then transfers property 1 to Jane on a ‘no gain/no loss’ basis and they start also to occupy property 1 as a residence.
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Joe and Jane elect property 1 as the main PPR. A few weeks later, a further election is made back to property 2. Over the next few months, Joe and Jane live in property 1 as a residence before the property is sold. Under this specific ruling, property 1 is deemed to be the main PPR for the period from the date of purchase to the date of transfer; then, as the property has been a residence, the period between the date of transfer and the date of sale is also capital gains tax-free as it is covered by the 18-month rule.
