30 SECOND TAX SPEED READ - CGT CONSULTATION: PROPOSED PPR CHANGES FOR MARRIED PERSONS & CIVIL PARTNERSHIPS
HMRC are running a consultation from 1 April – 1 June 2019 on their proposed changes on Principal Private Residence Relief (“PPR”) and Lettings Relief. However, also included in Chapter 7 of this consultation is a proposal to change how PPR works for married couples or civil partners (“Spouses”).
The general rule for transfers between spouses is that it is a no gain/no loss transfer, effectively a tax neutral event. So, when spouse A transfers 50% of a property to spouse B, no tax charge arises for Spouse A. However, it is what happens subsequently on the on-sale of such a property (in the context of claiming PPR) which is being reviewed by HMRC.
Essentially (to follow the examples) if spouse B acquires the 50% and at that time is occupying the property as a main residence, then he/she will benefit from PPR on the sale of their 50%, as it applies to the full period since spouse A owned the property.
The concern HMRC have is where spouse A may not have qualified for PPR in the period prior to the transfer to B, but the asset meets the PPR test in B’s ownership, any pre-non qualifying period in the hands of spouse A (as it relates to 50% later owned by B) is effectively blessed as PPR qualifying. The net result is less CGT payable.
On the flip side, these rules can apply to deny PPR in the reverse situation. Where a property was a main residence pre-transfer to spouse B, but because it wasn’t a main residence in B’s ownership, its pre-transfer status is washed away, and it is treated as non-qualifying for the full period since initially acquired by A.
HMRC are effectively proposing that spouses should always inherit the ownership period and past classification of the property regardless of whether it is a main residence at the time of transfer.
We await HMRC’s response to the consultation later in the year.