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28 July 2015
Issue: 4511 / Categories: Forum & Feedback

Determining whether the transfer of a property between a couple is tax efficient.

My client (Mr P) purchased a flat four years ago that has been his home since. His girlfriend (Ms G) moved in eight months ago. They now plan to buy a house jointly and will rent out the flat after putting it into joint names as well. This arrangement fairly reflects the larger share of the house deposit provided by Ms G because the equity in the flat has not been released by Mr P.

They have made an offer on a house so I have recommended an immediate declaration of trust on the flat to give Ms G her half interest while this is still her home. On a future sale of the flat she will hopefully obtain only or main residence by reference to her occupancy for the next couple of months or so and for the last 18 months. This assumes that the house purchase proceeds smoothly. I understand that if they had been expecting to move out of the flat when she moved in her occupancy might not qualify for relief. However, now that it has been her home for eight months I presume that this quality of residence does not alter by her acquiring a half share while planning to buy a house?

The flat may be sold eventually. A related point concerns the tax situation if the couple marry before then.
After their marriage, would it be safer for Ms G to transfer her half interest back to Mr P to make him sole beneficial owner before any contract of sale? However, TCGA 1992, s 222(7)(a) seems to say that Mr P would then be treated as having owned that half share of the flat only since 2015 rather than 2011. Am I right in thinking it cannot mean this?

Advice from Taxation readers would be much appreciated.

Query 18,621 – Househunter.


Reply by Chelsea

Given that Ms A is likely to leave the flat soon after acquiring an interest in it and that she and Mr P have already made an offer on the house before she acquired the interest, it is evident that she never had an intention to live in the flat as her home for any meaningful period for the necessary degree of permanence to be met.

Her eight months occupation of the flat before she acquired an interest does not alter the above analysis. Nor would that change if the occupation had been for longer.

Accordingly, she is unlikely to qualify for only or main residence relief for her interest in the flat.

For capital gains tax purposes, her base cost should be 50% of the market value of the flat when she acquired the interest. It might be that any gain on its eventual disposal is covered by her available annual exemption.
Mr P should obtain capital gains tax exemption on the transfer of the 50% interest in the flat to Ms A and relief should be available on any gain realised on his remaining 50% interest when the flat is sold.

Apart from his period of occupation of the flat, his final period of ownership up to 18 months should also be an exempt period.

In addition, letting relief should be available to Mr P against any gain arising from the letting period (not covered by the final period of ownership up to 18 months) calculated on a time-apportioned basis. The relief is restricted to the lower of £40,000 and the amount of the exempt gain arising on the applicable disposal.

The above analysis will not change should the couple marry before selling the flat but after vacating it. However, should they marry before moving out of the flat, TCGA 1992, s 222(7)(a) provides that the wife’s period of ownership of the flat will be the same as that of the husband. This means that each of them should qualify for only or main residence relief on the same basis, including letting relief capped at £40,000 each.

Note that s 222(7)(b) restricts the extended period of ownership given to the transferee spouse/civil partner for any overlap with a period where the transferee has another property which is their only or main residence.


Reply by ANA

The proposed declaration of trust will transfer a part share of the flat to Ms G and, for capital gains tax purposes, her period of ownership of the flat begins on the date of the declaration. Whether the flat is her main residence is a question of fact. Househunter should confirm whether Ms G owns any other properties and, if so, whether she intends to claim only or main residence relief on them.

Assuming Ms G owns no other properties, Househunter is right to be concerned that, if her interest in the flat is held for a short period only, a claim to relief may be challenged by HMRC. As a practical matter, she should obtain documentary evidence that the property is her main residence. For example, her name should be on the bills, she should be registered on the electoral roll at the flat’s address, and all HMRC correspondence should be addressed to the flat. Househunter should keep copies of these documents on file.

Property held in joint names is generally treated as owned equally for income tax purposes unless it is owned in some different proportion and a declaration is made to that effect. A declaration can be made only if the beneficial interests in the property correspond with the interests in the income. The declaration takes effect from the date it is made as long as notice is given to HMRC on form 17 within 60 days. Evidence of beneficial interest must be provided with the form.

Assuming that form 17 has been submitted, on the sale of the flat the proceeds will be split equally between Mr P and Ms G for capital gains tax purposes (see HMRC’s Capital Gains Manual at CG22020). Once married, any transfers of assets between them take place at no gain or loss under TCGA 1992, s 59. However, if Househunter can establish that the flat was Ms G’s only or main residence during her period of ownership, there would appear to be no particular advantage from doing so.

Issue: 4511 / Categories: Forum & Feedback
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