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Husband (H) and wife (W) started living apart in early 1988. From that time H lived in the matrimonial home and W elsewhere. They separated formally on 1 August 1988 and H transferred his one half of the matrimonial home to W and moved out. He purchased another residence and has since lived there. The married couple's allowance was not claimed and form 41(Sep) was submitted to the Revenue. No other settlements were made.
Husband (H) and wife (W) started living apart in early 1988. From that time H lived in the matrimonial home and W elsewhere. They separated formally on 1 August 1988 and H transferred his one half of the matrimonial home to W and moved out. He purchased another residence and has since lived there. The married couple's allowance was not claimed and form 41(Sep) was submitted to the Revenue. No other settlements were made.
They may now resume a normal relationship and H will return to the original matrimonial home. W would continue to own that property. Two points arise:
(1) H will sell his present home which will produce a gain of £150,000. Would this qualify for exemption under section 222, Taxation of Chargeable Gains Act 1992?
(2) W would like to buy this property as an investment. Would the open market value be the base value for future capital gains by W, or is the sale affected by section 58, Taxation of Chargeable Gains Act 1992?
(Query T15,826) – Splits.
'Splits' advises us that W moved out of the matrimonial home in early 1988 and that H & W formally separated on 1 August 1988. He does not advise us that they divorced so, for purposes of this answer it is assumed that they are still legally married. It is also assumed that W returned to the house when she obtained full beneficial ownership.
From the date of permanent separation H & W are each entitled to principal private residence relief in accordance with section 222, Taxation of Chargeable Gains Act 1992. H will, therefore, receive full principal private residence relief on the sale of his home. If there is a delay between him moving out and the subsequent sale, H can take advantage of section 223(2), Taxation of Chargeable Gains Act 1992 which deems the final 36 months of ownership to be a period of only or main residence. W should also be entitled to full principal private residence relief in respect of the former matrimonial home from date of purchase to the date of any future sale.
If W intends to buy the property vacated by H, then the base value for capital gains will depend on the timing of the sale. A husband and wife are connected persons by virtue of section 286(2), Taxation of Chargeable Gains Act 1992. This is so even if they are permanently separated and remains the case until a decree absolute is issued on divorce. Because of section 18(2), Taxation of Chargeable Gains Act 1992, transactions between connected persons are always treated as transactions otherwise than at arm's length. For this reason, if the sale occurs before a permanent reconciliation, the base value for future capital gains by W will be the market value.
If, however, H & W wait until after the reconciliation, the transfer will be treated as a no gain/no loss transfer in accordance with section 58, Taxation of Chargeable Gains Act 1992. In these circumstances, the base value for capital gains tax purposes will be calculated having regard to the original purchase price of the property.
Whilst it is appreciated that H wishes to receive consideration for the property, it must be mentioned that the sale of the asset to his wife will bring about a larger stamp duty charge than if the property were gifted. H & W should consider this fact and structure the transfer in such a way that stamp duty is kept to a minimum. – Carryduff.
Where a husband and wife live together, they can only have one exempt only or main residence between them (section 222(6), Taxation of Chargeable Gains Act 1992). But if they are no longer living together, then they are separate persons for the purposes of this exemption, and the husband's period of ownership from August 1988 to the date of sale will qualify for relief.
However, if he sells the house to his wife directly in a year of assessment in which they are living together again, then the disposal will be at 'no gain, no loss' (section 58(1), Taxation of Chargeable Gains Act 1992), and the only or main residence exemption will apply to no gain at all. The wife will take over the husband's 1988 base cost (plus indexation to April 1998, and taper relief including the 'bonus year').
One possibility is to recommend that the transaction between the parties takes place in the fiscal year before the couple resume co-habitation, but this is somewhat clinical and does not allow for the emotion in the situation.
A sale to a third party, followed by a purchase by the wife, will crystallise the husband's gain and increase the wife's base cost. However, it will increase transaction costs (including a not inconsiderable amount of stamp duty), and might be attacked by the Revenue as a 'preordained series of transactions'. It is not known whether the Revenue would consider this unacceptable tax avoidance or reasonable tax mitigation – it would seem harsh to deny the main residence relief which has genuinely accrued, just because the tax rules deem a gain not to arise.
It is worth remembering that the husband will qualify for only or main residence exemption on this house for the last three years of ownership of a property that has ever been his only main residence, even after he has resumed co-habitation with his wife in the exempt matrimonial home. If she owns it, it will be a chargeable asset in her hands from the date she acquires it, whether at a 1988 base cost or a current value; but if he continues to own it, only a fraction of any future gains will be chargeable. This is a possibility that might be explored, although clearly the reorganisation of the couple's assets on reconciliation may be affected by a number of different factors which must be taken into account. – Castlegate.
Extract from reply by 'Little Bird':
If the couple are living together at the time of the transfer, the wife will be treated as acquiring the property at the base cost of the husband for capital gains tax purposes.
In order to get around section 58, Taxation of Chargeable Gains Act 1992, the wife could set up a trust, either for herself or a third party. If the trust purchases the property from the husband, the capital gain is crystallised and he can claim his exemption.
