Example
1: CGT free transfer
Tom and Tina are married. Tina owns
equities valued at £150,000, which she bought for £100,000. Tina transfers
(i.e. gifts) the equities to Tom.
For CGT purposes, Tom is assumed to
have acquired the equities for £100,000 (not £150,000), i.e. Tina makes no gain
on the transfer and hence no CGT arises on her part.
Inter-spouse transfers of interest in a main residence
However, inter-spouse transfers of interests in a main residence are subject to special provisions and depending upon the timing of any such transfers a larger CGT bill may arise on a subsequent disposal than would normally be expected.
Example
2: Inter-spouse problem transfer
Alice purchased a property for £100,000 in
July 1994 in which she lives. She married Tom in July 2004.
She is considering giving Tom, now they are
married, 50% of the property as they are thinking of buying another property
into which they will move and then in due course sell the old property.
For CGT purposes should Alice give Tom 50%
before they move out or after?
They move out in July 2014 and the property
is sold later that month for £500,000.
A.
Assume the gift is made in July 2004 just after they marry and before they move
out
Alice and Tom each make a capital gain of:
[[£250,000 - £50,000] x 8.5/20] = £85,000
(8.5 represents the chargeable part of the 20 years of ownership in this
example).
Aggregate capital gains £170,000.
B.
Assume the gift is made in July 2004 just after they marry and after they move
out of the property
Alice makes a capital gain of [[£250,000 -
£50,000] x 8.5/20] = £85,000.
Tom makes a capital gain of [£250,000 -
£50,000] = £200,000.
Aggregate capital gains £285,000.
Under ‘A’, Tom is assumed to have acquired his 50% not at the date of the actual transfer but at the date the property had been acquired by Alice and is also assumed to have been his main residence from that time. Under ‘B’, Tom is assumed to have acquired his 50% on the date of the actual transfer at which time it is not his main residence.
Pre versus post marriage inter-spouse residence transfers
A similar problem may arise where X owns his residence 100% and wishes to transfer an interest therein (say 50%) to Y, who he is to marry. X and Y will then live in the property after marriage. Should X make the gift before or after they marry?
Example
3: Inter-spouse transfer or not?
X purchased his residence in 1994 for
£250,000. He lived in the property for 8 years as his main residence but then
vacated it for 6 years, re-occupying it in 2008 on the day of marriage.
He proposes to marry Y in 2008 at which
time the property is worth £500,000. The property is sold in 2014 for £650,000.
Assume
X transferred 50% to Y the day before marriage
Y is treated as acquiring the 50% for
£250,000 (note - the transfer is not an inter-spouse transfer and market value
applies to the 50%).
On sale, Y’s capital gain is totally exempt
from CGT as Y has always lived in the property as her main residence between
2008 and 2014.
On sale X’s capital gain is [[£325,000 -
£125,000] x 6/20 = £60,000.
Aggregate capital gains £60,000.
Assume
X transferred 50% to Y the day after marriage
Y is treated as acquiring the 50% interest
for £125,000.
On sale X and Y’s capital gain is each
[[£325,000 - £125,000] x 6/20 = £60,000.
Aggregate capital gains £120,000.
Practical Tip :
Inter-spouse transfers of a main residence may be problematic. It is therefore important to ascertain the precise timing if CGT liabilities on an eventual disposal are to be mitigated.
