Capital Gains Tax - Spouse to Spouse Transfer: is expmption good or bad?

Oxy1

Hi

I read the inland revenue and other on-line information and it appears to me that whenever assets are sold or gifted between spouses:
1. It is deemed that transfer happened at the original cost to the spouse that acquired it.
2. The date of acquisition is deemed to be the latest date of gift or transfer.

But if this is correct then I envisage two absurd scenarios:

Scenario1:
Wife owned a second home for 40 years and basically all proceeds would be capital gains taxable at 28% (bought for negligible amount, very expensive now so personal allowance can be disregarded and can assume most proceeds will be taxed at 28%). It appears she is able to transfer it to the husband and if he lived there from the point of transfer onwards he will qualify for principal residence relief thus fully avoiding any capital gains tax as throughout his ownership it will have been his PPR.

Scenario2:
Wife owned primary home for 40 year and therefore principal residence relief applies and no CGT would be payable on sale. Instead she transfers it to her husband and they immediately move to the husband's house. As husband is deemed to have acquired the property at wife's original cost (negligible) and he never actually lived there if he were to sell he would have to pay CGT essentially on the full amount of his proceeds.

Is is really what would happen CGT-wise in Scenario1 and Scenario2?

Laurajo_2

I believe that, in scenario two, provided the husband has lived in the house at some point even prior to ownership, he could claim PPR.

http://www.hmrc.gov.uk/manuals/cgmanual/cg64950.htm

Also, base cost will be 1982 values.

I think this would apply to scenario one as well, so effectively the husband inherits the wife's occupation - ie, he won't be able to claim PPR for the whole lot - just the final 36 months, or 18 months after April. Not 100 percent on this though.

silvercar

Marrried couple can only have one PPR between them, so in your scenario 1, if he lives in it as PPR then so does she and therefore she is entitled to some relief.

holly_hobby

Oxy1 wrote: »

Scenario1:
Wife owned a second home for 40 years and basically all proceeds would be capital gains taxable at 28% (bought for negligible amount, very expensive now so personal allowance can be disregarded and can assume most proceeds will be taxed at 28%). It appears she is able to transfer it to the husband and if he lived there from the point of transfer onwards he will qualify for principal residence relief thus fully avoiding any capital gains tax as throughout his ownership it will have been his PPR.

All beneficial owners (which aren't necessarily the legal owners), may apply their annual unused CGT exemption to the gain, which for 2014/15 is 11k pp, no lettings relief or PRR relief as they/she's never lived in it, although beneficial owners can also apply previously reported CGT losses to any gain (plus of course documented improvement costs, acquisition and disposal costs are also deductable).

CGT on property is only 28% if a higher rate tax, otherwise its 18%.

As above, if hubby moves in, and they want his PRR to apply to this property, then as a married couple it will also have to be delcared as her primary residence (despite the suggestion from the rest of your post that they actually live separately ?).

ie ....

Oxy1 wrote: »

Scenario2:
Wife owned primary home for 40 year and therefore principal residence relief applies and no CGT would be payable on sale. Instead she transfers it to her husband and they immediately move to the husband's house. As husband is deemed to have acquired the property at wife's original cost (negligible) and he never actually lived there if he were to sell he would have to pay CGT essentially on the full amount of his proceeds.

Forgetting for a moment there only being 1 PRR for a married couple, you're saying that despite being married, they have lived in separate properties ? ie "wife owned primary home" "he never actually lived there" "they immediately move into husbands house" ... which is confusing.

But essentially yes, no PRR, which means the only relief would be unused annual CGT, and as she would have full PRR relief for a further 18mths post vacation, it really makes no sense.

Unless she wasn't going to dispose of it post vacation (ie let out), and he is a lower rate tax payer and she is a higher rate tax payer, but even so, Mrs would qualify for additional exemptions/reliefs such as ... lettings relief (max 40k, PRR exemptions & 18mths, improvement, acquistion costs.

And it must always be bourne in mind that CGT is always based on beneficial ownership, which isn't necessarily the same as legal ownership.

Additionally if there is any os mge on the propeties being transferred, then there may be SDLT issues depending upon the TOE details and the amount of os mge at the point of transfer.

Hope this helps, which I think is a hypothetical question ??

Holly

CLAPTON

a little unclear on this


slightly rephrasing

-wife owns property for 40 years: she never lived there and it's always been let out: she has always declared all the rental income on her tax return

-wife and husband then decide to move into this property and live there as their PRR.

-wife transfers ownership to husband

-after (say) 5 years husband sells house and they move elsewhere

how is cgt calculated?

holly_hobby

I read it the wife has never resided in prop no1, so has no associated PRR benefits.

Firstly the spouses must be treated for CGT purposes as living together ... refer CG22073 for definitions if reqd.

Husband can only apply PRR exemptions from his residency (and of course we're back to 1 primary residency for married couples and PRR claims), as its never acted as hers during ownership, & last 18mths (if disposed post April 2014), where occupany isn't relevant ... so the prev 40yrs is still wholly exposed as (even if kept in her name, or her as jnt beneficial/legal owner), neither of them have any PRR exemptions for that period .... I think !

The only gain in doing it this way would be if she is a higher rate tax payer (residual gain @28%), and he is a lower rate tax payer, meaning his net( of exemptions/reliefs) gain would be taxed at 18% ... although if subsequently re-let post its base as primary residence he (and she) will qualify for lettings relief ... as obv for him to qualify for PRR, it will also have to be her declared primary residence, meaning that along with some PRR exmption, they'll also qualify for double lettings of 80k .. ie 2 x 40k if the later move back out again PLUS normal deductions such as prev reported losses, etc, etc.

Switching ownership between spouses really only changes who is liable to CGT on disposal ... and given that there is no prev PRR to inherit, the receipient only inherits the original acquistion price, with the only benefit being if they have differing tax bands to be applied to the net gain on disposal. Even so when you have a married couple, beneficial ownership which is what CGT is based on in any event, should be easy to prove .... if indeed in respect of the let unit the rental recipts are shared and declared under their individual SA returns.

It appears we have 3 properties in the mix there, which I don't know if this is a true situation, or just a made up hypothetical one by the post, which would explain things....

Property 1 - owned by wife, never resided in during ownership (up to this point) let out for 40 yrs - therefore no PRR exemptions available
Property 2 - owned by wife, primary residence for 40 yrs - possible full PRR exemptions available depending on nomination over prop no 3
Property 3 - owned by husband, primary residence of husband for an unknown period - which instead may have possible full PRR exemptions depending upon nomination over prop no 2.

Wife now wants to tsf legal ownership of prop no 1 (which is let) to her husband, meaning he will move out of prop no 3 (his residence) and move into no 1 instead, with wife remaining in prop no 2 as her residence. (which we know can't work for PRR on all units re CGT)

OR

Wife wants to tsf her primary residence (prop no 2) to husband, meaning that as this has been her primary residence fron pch,and if they are classed as living together for CGT purposes, he will inherit her PRR exemption and acquistion price. But, then she wants to move into his house prop no3 , and I assume let prop no 2 (her house) out ?

I think thats it .... if I've mockered anything up its because my head hurts ..... x

If this is a real scenerio, it needs an expert CGT practitioner to sift through the mire and establish the best way of tsfing or applying beneficial ownership to mitigate liability as much as possible.

Hope this helps

Holly xx