Transfer of property into joint names. Capital gains tax
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 Finance Act 2020 has also removed some of the capital gains tax dilema that used to hamper decision making in this area.
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 £12,300 for 2020/21.) Therefore, the tax free gains for a couple could be £24,600 as compared with the tax free gains for an individual of only £12,300. A gain is taxed at 18% to the extent that total gain and income is less than the basic rate tax threshold (of £37,500 for 2020/21). 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.
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. From 6 April 2020, this includes the final 9 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.
Update. Since the 2018 Budget, letting relief is only available to live-in landlords. Therefore. This consideration will now only affect a minority of lords, and even fewer who are married.
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. There is the potential for a substantial capital gains tax savings if the property obtains letting relief.
Under section 223 (4) of TCGA states that, to obtain the relief, the property must be let by the property owner. Therefore,
- Letting relief would not be obtained if transferred to the spouse if the couple resumed occupation between the tenants moving out and the property being sold.
- However, letting relief will be available for both spouses when the matrimonial home is transferred into joint names and subsequently let.
The restriction above used to place some taxpayers in a quandary because, PPR was only available if the property was transferred while the spouse was living in the property. Since the Finance Act 2020, it is no longer a requirement for the acquiring spouse to be living in the property at the time of transfer to inherit deemed periods of occupation for PPR purposes. Therefore, if letting relief is available it is better to transfer the property while it is being let.
The April 2018 Budget narrowed the conditions in which letting relief can be claimed. From the 6 April 2020, letting relief is only available to landlords who have lived-in with the tenant. HMRC have clarified that the relief will not be available for periods where the owner was or is in shared accommodation with the tenant. Therefore, lettings relief applies where the owner no longer shares accommodation with the tenant. However, the relief will only cover so much of the period as the property was being shared with the tenant. It is possible in these narrow circumstances for a spouse to inherit letting relief.
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.
Deemed period of ownership can still be inherited by the transferee spouse even where the transferee spouse had a PPR during that deemed period. This overrides the usual rule that a person can only have one PPR at any one time.
The number of principal private residences is one per married couple. Therefore, the number of possible exempt properties halves when a couple marry. With joint financial status, some couples may be able to offset the reduction in PPR by acquiring a higher value home.
Update. Following the Finance Act 2020, for disposals on or after 6 April 2020,it is no longer a requirement for the transferee spouse to be living in the property at the time of transfer for the deemed periods of ownership to be inherited. This effectively means that the annual exemption and unused basic rate of a transferee spouse can be used without any loss of principal private residence relief for the couple.
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.
A Mesher order can be used where the departing spouse does not wish to force a sale of the former matrimonial home until children have reached adult age. This is expanded upon in the section below on Tax planning.
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.
It is highly tax inefficient for a person to be both landlord and tenant at the same time. Cash received as letting income will likely be taxed, whereas cash paid in rent will not obtain tax relief. For some sole traders use of home as office could be available. Furthermore, there is a rsk about loss of PPR. Certain periods of absence can be regarded as a deemed period of occupation where the property is re-occupied. However, if left too late the tenancy agreement might not allow for a re-occupation of the property in time. Couples often leave historical property ownership arrangements in place. An investment property should be contemplated - for tax purposes - once a person or couple have acquired their home.
A Mesher arrangement is one in which a property is placed in Trust following divorce. Any period during which the departing spouse lived in the property and up to the date the property is placed in Trust is eligible for princiapl private residence relief. Under section 225 of the Tax and Capital Gains Act 1992, the property still qualifies for PPR relief provided the property is occupied by the beneficiary. Since the departing spouse did not have beneficial ownership of the property while it was held on Trust, that period will not be regarded as a period of absence for PPR purposes. The Trust usually ends when the child reaches a certain age. Gains related to the period after which the Mesher Order is no longer effective are chargeable to capital gains tax. The final 9 month period of ownership could exempt periods during which conveyance arrangements are being made.