Malcolm Finney looks at the often misunderstood and overlooked impact of inter-spouse residence transfers.
At the time of writing, Finance Bill 2020 amends the capital gains tax (CGT) principal private residence (PPR) relief legislation in TCGA 1992, s 222(7)(a). Subsection (7) provides for a ‘back-dating’ effect (see below) where one spouse transfers an interest in a dwelling-house to the other spouse (or if such an interest passes on the death of a spouse) but only if at the time of transfer the dwelling-house is their only or main residence.
Inter-spouse transfer of an interest in a PPR
(a) Pre-Finance Bill 2020
Where an inter-spouse transfer consists of an interest in a dwelling house which at the date of the transfer is their only or main residence, the recipient spouse’s period of ownership is treated as beginning at the date the transferor spouse’s period of ownership commenced (i.e. not from the date of the transfer). In addition, the recipient spouse inherits the transferor spouse’s previous use of the property.
However, this ‘back-dating/inheriting’ effect only applies where at the date of the transfer the dwelling was at that time their only or main residence; if it was not, then on transfer the normal inter-spouse rule would apply (i.e. the recipient spouse’s period of ownership would commence at the date of the transfer, and the history of use of the transferor spouse is irrelevant and ignored).
Example: Inter-spouse transfer post versus pre-marriage
Option 1: Transfer post-marriage property (only residence)
X owns 100% of a property, which she either let out or left empty over her 15 years of ownership whilst she lived with her parents.
X meets Y, who lives with his parents. They get married and move into X’s house and X gives a 50% interest to Y.
Y is treated as acquiring his interest at the date X acquired her interest (even though at that date they were not in fact married), but as X didn’t occupy the property prior to marriage, Y is also treated as not having occupied it.
Two years later the property is sold, but virtually the whole capital gain attributable to each of X and Y’s 50% interest falls subject to CGT.
Option 2: Transfer post-marriage property not only residence
Had X and Y got married but just before moving into the property and X gave Y a 50% interest there would be no backdating/inheriting effect and any capital gain made by Y on his 50% would not be subject to any CGT charge.
In fact, it would be even more beneficial for X to transfer their 100% interest to Y, not just 50%.
(b) Post-Finance Bill 2020
The amendment made by Finance Bill 2020 removes the condition that back-dating/inheriting only takes effect if at the date of transfer the property is their only or main residence. Thus, whether at the date of transfer the property is or is not their only or main residence, back-dating/inheriting occurs.
Thus, the recipient spouse is automatically assumed to have acquired their interest at the date the transferor spouse acquired their interest and, in addition, inherits the transferor spouse’s history of usage.
Manipulation designed to minimise any CGT charge on future disposals such as Option 2 above will no longer be possible; the Finance Bill amendment takes effect for transfers on or after 6 April 2020 (and for deaths occurring on or after this date).
Spouses should consider effecting any purchase of an only or main residence in both names with the percentage ownership adjusted to take into account the spouses’ circumstances.