The capital gains tax rules on gifts between spouses as being at ‘no gain/no loss’ apply until the end of the tax year of separation. Ideally therefore, the transfer of any jointly held assets should be made some time before the end of the tax year in which separation took place in order to be fully exempt. The asset (which could include the main residence) will be valued as at the date of the gift rather than the 50% share of the original cost. Thus an ‘uplift’ in the value of the property is achieved which may be beneficial should the property subsequently be sold but the owner not be able to take advantage of the full Principal Private Residence relief.
Should the transfer take place after the end of the tax year in which separation occurs but before the granting of the Decree Absolute, then the parties are treated as ‘connected parties’; as such the disposal is automatically treated as being at market value whatever the actual amount paid.
Where a main residence and another property are owned jointly, there will be tax advantages should the departing spouse leave the former matrimonial home on separation and go to live in the second property.
Appropriate transfers of both properties in the tax year of separation, together with an election by each that the property they are occupying is their main residence, should ensure that gains on both properties are exempt.
Adam and Eve separate in May 2016. They jointly own a Buy To Let property. Adam transfers the property to Eve in August 2016.
The property originally cost £200,000 with costs of acquisition being £2,500. Legal costs on transfer following separation and paid for by Adam were £2,500.
Adam’s deemed disposal proceeds are:
Cost (50% share) £100,000
Acquisition costs (50% share) £ 1,250
Legal costs £ 2,500
Total deemed proceeds £103,750
Eve’s revised base cost will therefore be her share (£101,250) plus £103,750 = £205,000.
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