Malcolm Gunn highlights a useful application of the reliefs available for transfers of a residential property between spouses in certain circumstances.
It is well known that transfers of assets between husband and wife (or civil partners) are generally exempt from capital gains tax (CGT) liability and also inheritance tax liability. However, there are some interesting aspects to the CGT exemption in so far as it relates to a transfer of a home between the parties.
The basic relief (in TCGA 1992, s 58) simply states that where an individual is living with his spouse or civil partner and disposes of an asset to the other, the acquisition and disposal is on a no gain, no loss basis. This provision says no more than that, so that the acquisition date for the transferee spouse is the date of transfer. But the original base cost of the transferor applies.
Special rule
When one looks at the provisions for main residence relief, there is a special rule for a transfer between spouses when it is their only or main residence. The special rule is that the period of ownership for the transferee spouse begins with the period of ownership of the transferor. So the ownership is backdated to when the transferring spouse originally acquired the interest.
However, this relates to the transfer of an interest in a property only when it is ‘the only or main residence’ of one of them. At one time, it was thought this rule applied to any property which had at some stage been elected or treated as main residence for them. However, HMRC changed its view of the provisions some years ago and now considers that the rule applies only where the property is the main residence at the time of transfer. So in other cases, there is no backdating of the period of ownership.
Inter-spouse transfer
Consider therefore the following situation. Husband owns a property which has been let since he first acquired it. The tenant is about to leave. There is a substantial capital gain. Once the tenant leaves, he transfers the property to his spouse and they then decide to use it as one of their residences. After 18 months, they decide that it does not suit them as well as they thought it would, and the transferee spouse decides to sell. If before the sale, the wife makes a main residence election for the property, the result for CGT purposes must be that the entire gain is exempt.
Quite commonly, husband and wife hold assets jointly, in which case the result just described would not hold good. This is because a person’s period of ownership of a property for main residence relief purposes dates back to the first acquisition of an interest in it. So although some element of exemption for the gain could be obtained by making an election, it would only be the last 18 months out of the total period of joint ownership.
The possibilities for exemption may arise for a holiday home which has been held by one of the parties. Assuming that sufficient use has been made of the property for it to constitute a residence of the parties, prior to sale it could be transferred to the other and they could would then make a main residence election and sell within 18 months. It may be that the mere transfer of the title from one to the other starts a new period of running for the purposes of making an election, although one would need to take a view on whether HMRC would accept that.
Practical Tip:
When a property has been held by one spouse alone, the slate is wiped clean as regards past usage if it does not qualify as their main residence at the time of a transfer to the other spouse.
