New rules for inter-spouse transfers of main residence

The issue

With all the chaos that was going on, you may have missed a rather subtle change that was introduced from 6 April 2020 in relation to property transfers between spouses or civil partners.

Up until 5 April 2020, where a home was transferred between spouses, the recipient spouse inherited the transferring spouse’s ownership history as long as the property was the transferring spouse’s only or main residence at the time of transfer. As always, no gain would be triggered on the sale which would be treated as a nil gain, nil loss transfer.

This requirement was removed from 6 April 2020 which prima facie has a favourable impact on the couple’s tax position because it seemingly allows the transferee to access tax reliefs which would not otherwise be due. However, on closer consideration things are not this simple and the true position depends on the circumstances of the couple.

When the rule change is good

Mrs X  lived in a property as her main residence for 10 years but has recently moved out to live with her husband and gives him 50% of the property. Under the new rules if her husband were to dispose of this property, then even though it has never been his main residence, he will benefit from the sizable exemption which he has inherited from his wife.

When the rule change is bad

Conversely, imagine a scenario where Mrs X has owned a property for 10 years but not lived in it. She and her husband now wish to move into it as their main residence and Mrs X transfers 50% of the property to him. Here the new rules are bad news for Mr X as he will still inherit a period of 10 years where PPR relief cannot apply. Under the old rules he would have had a clean slate and could potentially have benefitted from an ‘untarnished’ PPR holding period on a disposal (i.e. from the date of acquisition only).

Forbes Dawson view

This change in rules has knocked a planning opportunity on the head that existed pre-6 April 2020. This involved a spouse transferring a property with a ‘bad’ PPR history to a spouse before the couple moved in to the property. This allowed the PPR history to effectively be reset for the recipient spouse to clock-up ‘good’ PPR time from occupation. In fact the removal of the only or main residence requirement removes much of the scope for planning in this area because the recipient spouse simply stands in the shoes of the transferor spouse in all cases – which is probably the point and is consistent with HMRC policy.

 

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