Principal Private Residence Relief for the family home
In the case of a couple's main residence, Principal Private Residence Relief (PPR) may be available to exempt any gain arising after the year of separation.
However, for PPR to apply to the full gain, any sale or transfer must take place within 18 months of the transferring spouse leaving the property and it ceasing to be their main residence.
The 18-month period of absence will reduce to nine months with effect from 6 April 2020, which will make the timing even tighter to secure full PPR for the departing spouse.
This period of absence can be extended indefinitely under relevant CGT legislation if the disposal of the property is to the former spouse, and the following three conditions are satisfied:
- The transfer is made under an agreement between the spouses in connection with their permanent separation, divorce or dissolution, or under a court order;
- Throughout the period from the individual leaving the property to its transfer or sale, it continues to be the only or main residence of the other spouse; and
- The individual who left the property has not elected for another property to be their main residence for any part of that period.These will include a change to lettings relief, which in future will be available only to property owners living in a property while it is rented out.
The third condition is the one most likely to prove to be a stumbling block, as it will not always be advisable for the non-occupying spouse to forego PPR on any new main residence.There are a couple of other changes to the ancillary rules for PPR due to take effect from 6 April 2020 that may affect the tax analysis in certain circumstances in respect of any transfer of the family home.
A second proposed change aims to ensure that where a transfer takes place under the no gain no loss rule, the recipient spouse always inherits the full history of ownership of a property from a transferring spouse for the purposes of calculating PPR.
As a result, in certain situations, full PPR could be claimed on a subsequent sale of a property by the recipient spouse, despite the fact that the property might, for example, have been a buy-to-let property for years in the transferring spouse's hands.
PPR is not available for transfers of second homes, and the only relief from CGT in this case, or in respect of other non-business assets, would be the individual's annual exemption (£12,000 in tax year 2019/20), if available.
Deferred trust of land
Courts do not always order an outright sale or transfer of the family home.
Instead a "Mesher" or "Martin" order may be made, whereby the property is held in both parties' joint names on trust until a specified event occurs, for example (in the case of the former) the youngest child reaching 18 or leaving education.
Until that point, the occupying spouse has the right to reside in the property.
For tax purposes, the two spouses are regarded as making a disposal into trust at the date of the court order in respect of which PPR is available.
When the property is later sold, provided the conditions to extend the period of absence apply, PPR should be available to the non-occupying spouse, if he or she wishes to claim it, regardless of the period that may have elapsed since he or she left the property.