Private Residence Relief: Marriage and Divorce
If you sell a property which is your only or main residence or has been at some point during your period of ownership, Private Residence Relief (“PRR”) will be available to exempt either all or part of the capital gains that arise on the sale of the property. Please see my previous articles for more details of this relief in general, and how it can be calculated and claimed.
In particular, there are specific rules that married couples and couples who are getting divorced should be aware of and this article will focus on these specific areas. Call us us on 0113 887 8432 now to chat through your circumstances.
PRR and Married Couples
Where a married couple are living together, they can only have one qualifying property for PRR purposes between them.
If, at the date of marriage, they each own a residence and they continue to use both as residences, they can jointly nominate which of these should be treated as their main residence for PRR purposes. However, there is a two-year time limit from the date of the marriage for making the election (please see my previous article for more details on PRR elections).
Transfers Between Spouses
Transfers between spouses who are living together for any part of a tax year take place at ‘no gain no loss’ for capital gains tax (CGT) purposes, which means that the donee spouse inherits the historical CGT base cost of the donor spouse.
From 6 April 2020, if any property or a share of any property is transferred between spouses who are living together for any part of a tax year, the period of ownership of the transferee is treated as beginning at the start of the period of the transferor’s ownership. This means that the transferee acquires the entire PRR history of the transferor, which could be very valuable on a future disposal. Prior to 6 April 2020, this only applied if the property was the couple’s main residence at the time of the transfer.
The Tax Year of Permanent Separation
The above-mentioned ‘no gain no loss’ rule will continue to apply to transfers between spouses/civil partners throughout the whole of the tax year in which separation takes place (i.e. up to the 5 April in the relevant tax year) even if the divorce takes place before the end of the tax year. It is irrelevant whether the spouses/civil partners are actually living together at the date of the transfer but they must have been living together at some point in the tax year.
From 6 April 2020, up to the end of the tax year of permanent separation the transferee will also acquire the PRR history of the person that they are separating from on any property that is transferred to them from the other partner. This should be considered carefully by the relevant parties to the divorce (e.g. if the transferor let out the property for a long period PRR may not be significant and a large capital gain could arise for the transferee on a future sale).
After the Tax Year of Permanent Separation
Transfers which take place after the tax year of permanent separation no longer take place at ‘no gain no loss’ and the transferee will no longer acquire the PRR history of the person that they are separating from.
Until the decree absolute in relation to the divorce, the spouses are still connected for CGT purposes and any transfers are treated as a disposal at market value, which could give rise to capital gains.
After the Decree Absolute
After the decree absolute, the spouses should no longer be connected persons by way of the former marriage. Though the market value rule may still apply where transfers between the parties are not a bargain at arms length, such as a disposal under court order.
Extended PRR and the Marital Home
If one of the spouses/civil partners leaves the marital home (which is the couple’s main residence for PRR) and their share is disposed of within 9 months of them vacating the property, PRR will be available for the period between them moving out and disposal. However, if the property is disposed of more than 9 months after they leave, a capital gain may arise.
However, specific relief may be available which can allow PRR to apply to the whole period between leaving the home, and the disposal. The following conditions must be met for this relief to apply:
-The couple separate; and
-One partner ceases to occupy the property; and
-His/her share of the property is subsequently transferred to the former spouse/civil partner as part of a financial settlement.
In order for this to apply, the former partner must continue to use the property as their only or main residence and the disposing partner must not have made a PRR election for another property in the relevant period.
The rules around Private Residence Relief, particularly for married couples and on divorce, are complex and professional advice is recommended. If you require assistance, please contact a member of our team.