Transfer of property into joint names
Written by Ray Coman
A common concern for married couples is about moving property into joint names.
Any property which is not the owner’s home is liable to tax and with the increase in property values in recent years, capital gains tax is a growing concern. Transfers between spouses are exempt from capital gains tax. However, there are benefits and risks to the transfer of property in these circumstances.
The exemption from tax on transferring property into joint name presents an opportunity to save tax.
Each UK taxpayer is entitled to an annual exemption from capital gains tax. By transferring a property into joint names there would be two lots of annual exemption (of £11,100 for 2015/16.) Therefore, the tax free gains for a couple could be £22,200 as compared with the tax free gains for an individual of only £11,100. A gain is taxed at 18% to the extent that total gain and income is less than the basic rate tax threshold (of £31,785 for 2015/16). Gains are taxed at 28% to the extent that the gain increases total income and gains above the basic rate tax threshold.
There is an opportunity to save tax by moving property into joint names, where the transferee is liable to tax at a lower marginal rate.
Principal private residence relief
A taxpayer is not liable to capital gains tax on disposal of their home because of principal private residence relief. Where a property owner has not always lived in their property there are certain periods which are deemed periods of occupation. This includes the final 18 months of occupation.
An acquiring spouse inherits the period of occupation of the disposing spouse for the purpose of calculating principal private residents’ (PPR) relief.
This is explained in section 222 (7) of the Taxation of Chargeable Gains Act 1992 (TCGA.)
This is a valuable ruling because it allows the tax benefits of transferring property ownership into joint names while preserving principle private residents’ relief.
There is a further ‘letting relief’ where a property is let that has been the owner’s home. The gain which relates to the period that the property was let is exempt from tax. However, the amount of gain which can be exempt is capped at £40,000.
However, there is one letting relief per person. Therefore the maximum letting relief, for the couple, would double to £80,000 for a property in joint names.
The transfer should occur when the acquiring spouse is living in the property.
To obtain tax relief, the property must be the PPR of the acquiring spouse at the time of the transfer. Letting relief would not be doubled for a couple if the property is transferred while it is being let out. A further risk is that the PPR will be lost on that portion now owned by the acquiring spouse.
As a further restriction, section 223 (4) of TCGA states that, to obtain the relief, the property must be let by the property owner. Therefore, letting relief will be available for both spouses when the matrimonial home is transferred into joint names and subsequently let.
PPR not lost on marriage
It is possible that an ‘inherited’ period will overlap with a period when that person had another PPR. However this will not prevent the new owner obtaining PPR relief on both properties. The inherited period is used only to calculate the letting relief and principal private residence relief ‘fraction.’ For example, if a new wed jointly owns a property previously held by just one partner, the person moving in does not become liable to capital gains tax, just as a consequence of owning a property before moving in.
The number of principal private residences is one per married couple. Therefore the number of possible exempt properties halves when a couple marry. Where an individual or married couple own more than one property, greater exemption from capital gains tax results from consolidating property investment into the matrimonial home.
The risk about loss of PPR on divorce
If a couple separate, with one partner living in a new home and the other partner staying the matrimonial home, the partner living in the new home will be liable to tax.
Under section 225B (of the Taxes and Capital Gains Act 1992), property of departing divorcee continues to be eligible for PPR. However if the departing divorcee buys a new home, and made a claim for Section 225B to apply, they would then be liable to capital gains tax on the home they bought after divorce. This is because a person can only have one PPR at any given time.
Principal Private Residence relief is among the most generous tax exemptions in the UK system. It provides a significant opportunity for retaining personal wealth.
A few simple measures taken at the right time can significantly reduce tax liability. The loss of PPR and letting relief on half of the property could well be greater than any tax saved by doubling the annual exemption and saving in marginal rate.
This article was written by Ray Coman, Chartered Tax Adviser and independent consultant. His company Coman & Co. Ltd. has been established since 2009 and offers a range of tax compliance and tax advice services.