By transferring a property into joint names prior to selling is an easily avoided mistake – read our blog to see if this could potentially save you tax.
Disclaimer Alert: This blog is intended as general guidance only. We strongly recommend you seek professional advice before taking any action.
Where a property is wholly treated as your only home and qualifies for Private Residence Relief, whether owned jointly or in one name, the relief shelters any gain that arises on sale and there is generally is no tax to pay.
However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.
Take advantage of certain rules for spouses and civil partners
There are some breaks in the tax system for married couples and civil partners in certain situation which gives them the ability to transfer assets between each other at a value that gives rise to no tax. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. In the right circumstances this could enable a couple to utilise available annual exempt amounts and lower tax bands.
Capital gains tax on residential property gains is charged at 18% where total income for basic rate taxpayers (set at £37,500 for 2019/20) and 28% thereafter.
Suppose Ron and Rita have been married a number of years. In addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.
Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).
If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of around £24,640.
However, as Rita has her basic rate band and annual exempt amount available, making use of the spousal rule to transfer the property in jointly held names prior to sale can potentially save the couple a lot of tax. If the circumstances qualify, each will realise a gain of £50,000.
As far as Ron is concerned, he will have a chargeable gain of £38,000 on which tax of £10,640 will be payable.
Rita will also have a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.
By taking advantage of tax exemptions, the couple could be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110!
Sorted you would think.
Not quite. As with most things in life, it’s not always that easy. Although the above can work in theory there are dangerous pitfalls which must be avoided to ensure the transaction doesn’t fall foul of HMRC anti-avoidance. This is where specialist tax planning advice required to guide you through the legal maze.
If you need help with this, or have a property transaction with a potential large tax bill whether CGT, Stamp Duty or VAT, speak to us in the first instance by calling 0114 275 6292 or email email@example.com. We may be able to help you save some money.