Prior to 6th April 2020, the transferee needed to be living in a property as their PPR to inherit the PPR history of the transferor.
However, for disposals on or after 6 April 2020 (if a dwelling-house or part of a dwelling-house is transferred between spouses or civil partners who are living together, whether by sale or by gift, the period of ownership of the transferee for PPR purposes is treated by s222(7)(a) TCGA92 as beginning at the beginning of the period of ownership of the transferor; the wording of the legislation being changed by FA 2020.
Let’s illustrate the impact.
Scenario 1
Kate and William are married, and Kate is planning to transfer half of a property to William, who does not currently own any other property. Kate has owned the property since April 2010, i.e. for around 10 years but has never lived in the property, however, following the transfer Kate and William will begin to occupy the property together.
If the transfer takes place before 5 April 2020 but before they move into the property as their main residence, then William’s ownership period for PPR purposes would begin from the date of the transfer only as the conditions in the earlier version of 222(7) would not be met. William would accrue PPR relief on the property from the date of his acquisition when it also becomes his and Kate’s main residence and, if William lived there until the property was sold, then the entire gain should be exempt for William under current tax legislation whereas Kate would only obtain PPR from her occupation but not for the earlier period back to 2010.
If the transfer takes place on or after 6 April 2020, or for a transfer before 6 April 2020 after they moved into the property as their main residence then William’s ownership period for PPR purposes would mirror that of Kate’s, i.e., William would be deemed to have owned the property since April 2010 in calculating PPR. If Kate and William live in the property for 10 years and then sell the property, then only around 50% of the gain would be exempt from CGT for both of them.
Scenario 2
The scenario is the same as above, but Kate lived in the property from April 2010 as her main residence before later moving in with William into another property after which her own property was let. William has never lived in the property.
Kate is considering transferring 50% of the property to William so that they can share the rental income and make use of William’s basic rate tax band. In the future they plan to sell the property and would also like to make use of Williams’s annual exemption and the basic rate CGT band.
If the transfer takes place before 5 April 2020, then because William does not currently live in the property, William will not receive Kate’s ownership period or occupation period for PPR purposes. If the property was sold in 10 years, then virtually all of the gain will be taxable for William, aside from his annual exemption.
If the transfer takes place on or after 6 April 2020, then because the condition of currently occupying the property has been removed, William is deemed to have owned the property since April 2010 for PPR purposes and so inherits a qualifying PPR period (plus the final period exemption of 9 months. If the property is sold in 10 years’ time, then just under 50% of the gain would be exempt from CGT (for both Kate and William) under current tax legislation.
These two scenarios highlight the need to consider the PPR implications of property transfers between spouses and civil partners. This is easy to overlook when concentrating solely on the income tax saving on rental income.
If there is an existing mortgage on the transferred property or other consideration is being paid, remember to consider the SDLT position too.
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