Sarah Bradford considers when it may be beneficial to put a property into joint names prior to a sale.
A capital gains tax (CGT) liability may arise on the sale of a property that has not been the owner’s only or main residence throughout the whole period of ownership.
Putting the property into joint names with your spouse or civil partner or transferring a share to them prior to sale may save tax in some cases.
No gain/no loss transfers
The tax legislation offers a number of breaks to married couples and those in a civil partnership. One of these is the ability to transfer assets between spouses and civil partners for CGT purposes at a value that gives rise to neither a gain nor a loss.
This can be particularly useful from a tax planning perspective, as it opens up the possibility of utilising unused annual exempt amounts and lower rate tax bands to reduce the gain on a sale of an asset. To take advantage of the ability to transfer assets at a value that gives rise to neither a gain nor a loss, the spouses or civil partners must be living together in the tax year in question.
The deemed disposal value is the value that gives rise to neither a gain nor a loss. The cost of the asset/share of the asset in the hands of the transferee spouse or civil partner is the same as the disposal value of the transferor.
Using the annual exempt amount
Taxpayers, regardless of the rate at which they pay tax, are entitled to an annual exempt amount for CGT purposes. The annual exempt amount is set at £12,000 for 2019/20. If it is not used in the tax year, it is lost.
Thus, if a second home or investment property is owned solely by one spouse or civil partner and the other spouse or civil partner has not used their annual exemption for the tax year, transferring the property into joint names prior to sale can make use of the annual exempt amount to reduce or eliminate the CGT liability.
The following simple example illustrates the position.
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Example 1: Sale of holiday cottage Mr Smith has a holiday cottage, which he wishes to sell. The sale will realise a gain of £20,000. Neither he nor his wife, Mrs Smith, have used up their annual exempt amount of £12,000. If the property remains in Mr Smith’s sole name, he will realise a chargeable gain of £8,000, on which CGT will be payable. However, if the property is transferred into joint names prior to the sale, they will each have a capital gain of £10,000. However, as this is less than the annual exempt amount, there is no CGT to pay. |
Reducing the rate at which tax is paid
Making use of the opportunity to transfer assets on a no gain/no loss basis can also be useful where one spouse or civil partner pays tax at a lower rate and has not used up all of their basic rate band. The share that is transferred can be tailored to secure the best possible relief.
This is illustrated in the following example.
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Example 2: Transfer of property interest to non-earning spouse Mr and Mrs Jones have been married for a number of years and live together with their three children in the family home, which is their only or main residence. Mrs Smith has a seaside cottage that she purchased with money inherited from her grandmother in 2012 for £300,000, which she wants to sell. She agrees a sale price of £360,000. Mrs Jones is a higher rate taxpayer. Mr Jones is taking a career break to look after the children and has no other income. Neither spouse has used up their annual exempt amount. If the property remains solely in Mrs Jones’ sole name prior to sale, she will realise a gain of £60,000, of which £12,000 will be covered by her annual exempt amount, leaving a capital gain of £48,000 and a CGT bill of £13,440 (i.e. £48,000 @ 28%). |
By transferring a share in the property to Mr Jones prior to sale, the couple can take advantage of his basic rate band and annual exempt amount. The best result is obtained by transferring an 80% share to Mr Jones. This will leave Mrs Jones with a chargeable gain of £12,000, which is covered by her annual exempt amount. Mr Jones will have a capital gain of £48,000, of which £12,000 will be covered by his annual exempt amount, leaving a chargeable gain of £36,000, on which tax of £6,480 will be payable (i.e. £36,000 @ 18%).
This saves the couple £6,960 in tax.
Property has been a main residence
If the property has been a main residence at some point and has been let out, lettings relief in its current form will mitigate some or all of the gain attributable to the let period. However, this relief is expected to be seriously reduced from 6 April 2020. From that date, lettings relief will only be available where the landlord is in shared occupancy with the tenant. Also, from 6 April 2020, the final period exemption is to be reduced from 18 months to nine months.
Where private residence relief is available, and possibly lettings relief, the decision as to whether to put a property into joint names may be more complex. For private residence relief to be available, the individual must have lived in the property as his or her main residence at some point. Where the sole owner ticks this box but his or her spouse or civil partner does not, putting the property in joint names may not always be the best option, as gaining access to a lower tax bracket or unused exempt amount may come at the price of a loss of lettings relief or main residence relief.
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Example 3: Sale of former main residence Tim owned a flat prior to entering into a civil partnership with Neil, which he lived in as his main residence for three years, before buying a property with Neil. He lived in the property as his main residence for 36 months and let it out for 36 months. He expects to realise a gain on sale of £72,000. Assuming the sale takes place before 6 April 2020, he will benefit from a final period exemption of 18 months and lettings relief. The private residence relief is £54,000 (i.e. 54/72 x £72,000), and the gain attributable to letting is £18,000, which is covered by lettings relief. Thus, there is no CGT to pay, and so nothing to be gained by transferring a share in the property to Neil. After 6 April 2020, the final period exemption is reduced to nine months and lettings relief is lost. Private residence relief is reduced to £45,000 (i.e. 45/72th), leaving a capital gain of £27,000. Assuming an annual exempt amount of £12,000, this will leave a chargeable gain of £15,000. Neil will not benefit from private residence relief as the property was never his only or main home. Transferring a share of the property to Neil will only be worthwhile if this reduces the overall CGT bill. Transferring a 16.67% share to Neil will give him a gain of £12,000, which is covered by his annual exemption. Tim’s gain is reduced to £60,000 of which 45/72ths (i.e. £37,500) is covered by private residence relief. The remaining gain is £22,500, of which £12,000 is covered by the annual exempt amount, leaving a chargeable gain of £10,500. Although the gain is reduced by transferring a share to Neil to use his annual exempt amount, the reduction in the capital gain is less than the £12,000 sheltered by Neil’s exempt amount, as some of the private residence relief is lost. |
Practical tip
Putting a property in joint names prior to sale to take advantage of the no gain/no loss rule can be beneficial to use up annual exempt amounts and lower rate tax bands that may otherwise be wasted. However, where other reliefs are available, it is important to ‘do the sums’ as there may be trade-off. Also, the position after 6 April 2020 may be different to that before that date.
