.png)
.png)
Will the transfer of a share in a main residence mean a loss of relief?
With clients increasingly investing in buy-to-let properties, we are familiar with the mechanics of putting in place a declaration of trust to split the underlying ownership of a property and then notifying HMRC of this with a form 17.
A new client has recently relocated with his wife and children and since January 2015 they have let their former jointly-owned main residence. The income has been split 50:50, but they now wish to make a declaration of trust to change the ownership of the property, and as a result the underlying income, to a 95:5 ratio.
The husband is a higher-rate taxpayer while his wife has no income apart from the rent. If relevant, they are renting a property while looking for a house to purchase as their new main residence in their new location.
Our concern is that, because the property is being transferred after they have moved out, there is a potential loss of only or main residence relief. HMRC’s Capital Gains Manual at CG64950 states that if a residence is transferred between a husband and wife, whether by sale or gift, the period of ownership of the transferee is treated by TCGA 1992, s 222(7)(a) as beginning at the beginning of the period of ownership.
The following condition must be fulfilled: the husband and wife must be living together and the residence must be their only or main residence at the date of the transfer.
Does this mean that, on any subsequent sale of the property the main residence relief will be restricted? If so, can this be reversed by the declaration of trust being revoked before sale?
Query 18,587– Homely
Reply from Steve Kesby
Homely is correct that the effect of TCGA 1992, s 222(7)(a) – taken together with s 227(b) – is that a transferee spouse inherits the transferor spouse’s period of ownership, and that (as stated in HMRC’s Capital Gains Manual at CG64950) this applies only when the transfer takes place while the property is occupied as the couple’s only or main residence.
However, this is relevant only when the transferee spouse has not previously had any interest due to the preamble to s 222(7), which states: “the period of ownership, where the individual has had different interests at different times, shall be taken to begin from the first acquisition.”
Thus, in the situation that Homely describes, both the husband and wife will have a period of ownership that began when they originally acquired the property as joint owners, and will have a common pattern of occupation due by virtue of s 222(6). This will not alter as long as they each retain an interest in the property.
Thus, the transfer suggested will not cause a restriction in the relief as a result of the operation of s 222(7)(a). It would, for example, be possible to transfer the ownership to a 95:5 ratio, as Homely suggests, for the period of the letting. The ownership could revert to a 50:50 ratio at some point before any sale, and s 222(7)(a) will not cause a restriction in relief.
Where the plan does have an impact on the relief available is in the allocation of the gain between the spouses. The gain for the period during which the property was actually occupied as the main residence will be shared between them on a 50:50 basis, in line with their ownership.
Reply from Chelsea
TCGA 1992, s 222(7)(a) provides for an extended period of ownership for the purpose of computing only or main residence relief.
This applies in respect of the transfer of an interest in the residence between spouses or civil partners, whereby the start of the period of ownership for the transferee is deemed to be the date when ownership was acquired by the transferor. This extended period of ownership is given on condition that the couple are living together and the residence is their only or main residence.
Note that s 222(7) provides that the period of ownership for an individual holding different interests at different times shall be taken to begin from their first acquisition of an interest in the qualifying residence.
Therefore, the fact that the husband and wife have varied over time the levels of their respective interests in their jointly-owned former main residence should not restrict the main residence relief and the capital gains tax exempt period should start from the date that they acquired the property to the date that they moved out plus the subsequent period (up to a maximum of 18 months) to the date of its sale.
