Private residence relief and the former marital home

Transfers between spouses

Our individual is right to question the tax position before he transfers a share of his home to his wife. The rules changed in April 2020 and perhaps he recalls reading something which has set alarm bells ringing. Before looking at the new rules he needs to understand those which apply for transfers of assets between individuals who are married or in a civil partnership.

No gain no loss

From the date a marriage or partnership is registered a transfer from one spouse/partner to the other is treated as if it were a sale at a price that results in neither a capital gain nor a loss. This is called the “no gain no loss” rule. It boils down to the transfer from one spouse/civil partner to the other being treated as if it were a sale equal to the cost of the asset (for capital gains tax (CGT) purposes). The no gain no loss rule applies even if one spouse/partner pays the other for the asset.

Example. Martin and Jackie are just married. Martin makes a gift of a family heirloom, an antique diamond ring, to Jackie. It’s worth £30,000. When Martin inherited it it was valued at £20,000. The gift is treated as if Martin sold the ring for £20,000, meaning he made neither a gain nor a loss. Jackie is treated as having paid £20,000 for the ring. 

Depending on Martin’s CGT position it might have been more tax efficient for him to have transferred the ring just before the marriage. That way the gift would have been treated as a sale at ”market value” (the price a third-party buyer would pay for it, i.e £30,000). Martin would then be taxable on a deemed gain of £10,000, but if he hadn’t used his CGT annual exemption (£12,300 for 2021/22) it would cover the gain meaning he wouldn’t face a tax bill. Jackie would have been treated as having paid £30,000 for the ring, meaning if she sold it any potential gain would be less by £10,000 because her deemed cost was £30,000 instead of £20,000. This tax-saving plan would also apply to any other asset.

Transferring a share of your home

The no gain no loss rule applies to the transfer of a property but with the added complication of private residence relief (PRR). If prior to 6 April 2020 one spouse/partner transferred a share of their home to the other, the receiving spouse/partner would have been treated as owning the property from the same date as the transferring spouse but without their entitlement to PRR. If on a later sale of the property there’s a gain, the spouse/partner who transferred a share might be entitled to more PRR than the other; that spouse/partner might therefore end up with a tax bill.

Since 6 April 2020 where one spouse/civil partner transfers, or has transferred to the other, a share of a property, the receiving spouse/partner inherits the same entitlement to PRR.

Selling your home after a transfer

For our individual it’s good news. Putting together the rule for intra-spouse/partner transfers and those for PRR since 6 April 2020 means there’s no CGT to worry about when he gives his wife a share of his property. If later they sell the property they’ll both be entitled to the same PRR.