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Inter-Spouse Transfers And Capital Gains Tax Main Residence Relief

Shared from Tax Insider: Inter-Spouse Transfers And Capital Gains Tax Main Residence Relief
By Malcolm Finney, September 2014
Malcolm Finney explains how inter-spouse transfers at the wrong time may result in higher capital gains tax charges.

Exemption from capital gains tax
There is no capital gains tax (CGT) charge on any capital gain made on a disposal (e.g. sale) of a dwelling house that has been the main residence of the owner throughout the period of ownership. Often a married couple (or civil partners) (who are permitted to have only one main residence) own their residence jointly (typically, but not necessarily, 50:50) in which case no CGT arises on either party on any gain made on a disposal.

If the property has not been used as a residence for any period of time then some part of any gain made on disposal will be subject to CGT. Because the marginal rates of income tax of spouses may be different (and thus the rate of applicable CGT) inter-spouse transfers of interests in the residence are often effected to mitigate tax charges. 

CGT free inter-spouse transfers
Generally, transfers of assets between spouses take place at no gain/no loss for CGT purposes.

 

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.


Malcolm Finney explains how inter-spouse transfers at the wrong time may result in higher capital gains tax charges.

Exemption from capital gains tax
There is no capital gains tax (CGT) charge on any capital gain made on a disposal (e.g. sale) of a dwelling house that has been the main residence of the owner throughout the period of ownership. Often a married couple (or civil partners) (who are permitted to have only one main residence) own their residence jointly (typically, but not necessarily, 50:50) in which case no CGT arises on either party on any gain made on a disposal.

If the property has not been used as a residence for any period of time then some part of any gain made on disposal will be subject to CGT. Because the marginal rates of income tax of spouses may be different (and thus the rate of applicable CGT) inter-spouse transfers of interests in the residence are often effected to mitigate tax.
... Shared from Tax Insider: Inter-Spouse Transfers And Capital Gains Tax Main Residence Relief