How an inter-spouse transfer can avoid residential capital gains tax rates
12th December 2022
Posted in Articles, Capital Gains Tax by Andrew Marr
The issue
Residential property gains effectively have an 8% capital gains tax (‘CGT’) surcharge and so it is preferential for land to be treated as non-residential property for CGT purposes.
The definition of residential property includes land that consisted of, included, or subsisted for the benefit of a dwelling at any time falling on or after the date that person acquired the land. Whether the land falls within this definition will depend on who the seller is and how they have historically used the land.
Example
Emma owned a house and 5 hectares of land (grounds of the house) for seven years. She sold the property three years ago but retained the land as it had development potential. This sale qualified for Principal Private Residence Relief and so there was no CGT payable. For the last three years, Emma has rented the land to a local farmer but has now obtained planning permission to build several residential houses. The value of the land has increased, and she expects to make a £1m gain on its disposal. Although there can be questions around whether such a profit should be taxed as capital or income, let us take as a given that this transaction will give rise to a capital gain.
Scenario 1 – Emma sells the land
Emma sells the land and realises a £1m capital gain. As the land has historically subsisted for the benefit of Emma’s property, the land retains its residential status. A time apportionment methodology then needs to be used, so that it is only the period when the land included a dwelling that is subject to the residential rates of CGT. Emma would therefore pay 28% CGT on £700,000 and 20% CGT on the remaining £300,000. The CGT liability would therefore be £256,000. For the buyer, the land will clearly be non-residential, as it has never been attached to a dwelling since he acquired it.
Scenario 2 – Emma gifts the land to her husband before an onward sale by him
Emma gifts the land to her husband, Ben, prior to Ben selling it to the buyer. The inter-spouse transfer rules mean that the gift is made at no gain no loss and therefore Ben ‘inherits’ the tax base cost from Emma and so that he makes the £1m capital gain. However, Ben does not ‘inherit’ Emma’s ownership history of the land and therefore it does not have residential status. Therefore, in these circumstances, the taxable gain would be non-residential and the CGT liability would be £200,000, giving a tax saving of £56,000.
Forbes Dawson View
We do not think that this is something that is widely known about. The key take home message is that there may be tax planning opportunities when assets are to be disposed of which are not residential at the point of sale but which have a residential history. In these circumstances the spouse transfer should have the effect of ‘wiping the historical slate clean’. In principle, this should also work for jointly owned properties, although it would only work for 50% of any gain.
