How to sell your former home tax efficiently

You want to sell your former home. You’ve been told you can reduce any capital gains tax significantly by giving a share of the property to your spouse. It sounds too good to be true – are there any traps to watch for?

CGT planning for couples

Although independent taxation for married couples (and civil partners) has been around since 1990 there are still some tax advantages to being hitched. For example, the chance for one spouse to hive off some of their capital gains to the other to make use of their annual exemption, losses or lower tax rate.

Example

 Janet owns a house which was her home for four years before she married John. For the last six years she let it, but is now planning to sell. She expects to get £140,000 more for it than she paid. Part of the gain is covered by the private residence relief (PRR) (£56,000, i.e. 4/10 x £140,000) because it was Janet’s home, plus another relief for the period of letting (the “letting exemption” (LE)) covers £40,000 of the remainder. That leaves £44,000 taxable. John hasn’t used his annual exemption, therefore if Janet gives him a share of the property, the corresponding part of the gain is taxable on him and not her and he can use his annual exemption (£11,700 for 2018/19) to reduce the taxable amount.

Tip. Janet’s gift should be made before contracts for the sale are exchanged as this is the date the property is sold for capital gains tax purposes and not the date of completion. Your solicitor should be able to draw up a simple deed of gift (it might be more complicated if there’s a mortgage on the property, but still possible) giving a share of the property without the need for a formal conveyance. And as it’s a gift there’s no stamp duty land tax.

Where’s the catch?

This tax-saving plan seems so simple you would think nothing could go wrong. That’s not the case. Even accountants and tax advisors get caught out by the way the rules for PRR apply.

Trap 1. By transferring part of the property and thus the capital gain to John, Janet will lose a proportionate amount of her PRR. While the PRR can be transferred with a share of the property it can only be done where it’s both their main home at the time (see The next step ).

Trap 2. The amount of LE allowed can be affected by the amount of PRR. Therefore, the loss of PRR caused by Trap 1 can also reduce the LE (see The next step ).

Example

 If Janet gives John a half share of the property, her PRR is correspondingly reduced, i.e. from £58,000 to £29,000. The letting exemption is also reduced to £29,000 because of Trap 2. The total loss of tax reliefs to Janet is therefore £58,000, while the extra exemption provided by John is just £11,700. If Janet and John are both higher rate taxpayers, their tax-saving plan would actually end up costing them £12,964 (£58,000 – £11,700)) x 28%).

Still a good plan

Despite the two traps, the plan of splitting gains is sound. To arrive at the right split you or your accountant need to crunch the numbers when a price for the property has been agreed, but before contracts are signed. Your solicitor can then draw up a deed of gift for precisely the right share of the property to achieve the maximum tax saving.

Summary

A gift must be made before the exchange of contracts to be effective. Capital gains tax private residence relief and the letting exemption may be reduced as a result. Therefore, work out the effects of it before the exchange of contracts to find the share of the property that should be transferred to achieve the best result.