Joe Brough highlights how the date of transfer of an interest in a main residence between spouses can affect the amount of capital gains tax principal private residence relief available.
Transfers of assets between spouses who are living together are treated as taking place at neither a gain nor a loss for capital gains tax (CGT) purposes under TCGA 1992, s 58.
Where the asset transferred is a property which at some point has also been occupied as the only or main residence of one of the couple, principal private residence (PPR) relief will need to be considered on its disposal.
Finance Act 2020 inserted new rules which apply for spousal transfers occurring pre and post-6 April 2020, which will need to be factored in when calculating the overall CGT payable.
Pre-6 April 2020 transfers
Where the transfer was made between spouses on or before 5 April 2020, the recipient spouse only inherited the ownership history of the transferor spouse if the property was their only or main residence at the time of the transfer (TCGA 1992, s 222(7)).
If at the time of transfer the property was not occupied as the couple’s only or main residence, the ownership history of the transferor did not pass to the recipient spouse. This scenario could be useful for mitigating the CGT exposure of a couple if the transferor spouse had periods of ownership which did not qualify for full PPR relief.
For example, one spouse could transfer their ownership of a property which had previously been their main residence to the other, just prior to moving back into the property. In this case, the recipient spouse’s share in the property would qualify for full PPR relief from the date of moving in, notwithstanding any periods of non-qualifying PPR periods by the transferee spouse.
However, these rules could also work against a couple if they did not move back into the property post-transfer at all. As the transferee spouse did not inherit the ownership history, their ownership period would not be able to benefit from any PPR relief at all, but would still have a base cost in proportion to their share of the original purchase price.
Post-6 April 2020 transfers
These rules were changed in Finance Act 2020 for transfers taking place on or after 6 April 2020.
Now, the ownership history of the property transfers to the recipient spouse, irrespective of whether the couple were occupying the property as their main residence at the time of the transfer or not.
Example: Transfers of interests
Sam has owned a property for ten years. She lived in it for five years before going travelling, during which time the property was rented out. Whilst travelling, Sam met Sandy, and they got married.
Immediately after marrying, Sam gifted a half share in her property to Sandy before they moved into Sam’s house together as their main residence.
PPR position up to 5 April 2020
As Sandy took ownership of the property prior to occupying it, Sam’s ownership history did not pass to Sandy. This means that Sandy’s period of ownership would not take into account Sam’s periods of non-occupation. Therefore, if Sam and Sandy continued to occupy the property as their only or main residence up until the date of disposal, Sandy’s share of the gain would be fully covered by PPR relief.
PPR position from 6 April 2020
In this case, Sandy would inherit Sam’s ownership history, no matter when the transfer was made. On disposal, Sandy’s PPR relief would be restricted by reference to any non-qualifying PPR periods by Sam, despite the fact that these were pre-marriage and prior to his actual occupation of the property.
Practical tip
When calculating the CGT position following a transfer of ownership between spouses, it is important to document the timeline of ownership periods accurately to ensure that the correct relief is calculated.
