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Topic: Elections and claims

Claim for private residence relief to apply to a former home
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Claim for private residence relief to apply to a former home

Claim for private residence relief to apply to a former home

When a marriage fails, tax planning is vital and sometimes urgent or avoidable tax liabilities can arise. An example of this is capital gains tax and the matrimonial home. Where one spouse (or civil partner) moves out and transfers their interest to the other as part of the financial settlement, private residence relief can be lost.  Use our letter to make an election to treat your former home as your main residence from the date of separation to the date of transfer.

Transfer

The normal capital gains tax (CGT) rules which apply to married couples who live together apply for the whole of the tax year in which they separate. This means a transfer from one spouse to the other is treated as if it were a sale at a value which results in neither a gain nor a loss. However, if it is in a later tax year, the no gain, no loss rule doesn’t apply. The transfer instead counts as if it were a sale at market value, which might result in a taxable gain for the spouse who makes the transfer.

Where the transfer takes place later than 18 months following separation, CGT private residence relief (PRR) is not allowed for the period after 18 months has elapsed. However, the CGT liability can be avoided by the transferor making an election under s.225B Taxation of Capital Gains Act 1992 to treat the former home as their main residence from the date of separation up to the date of transfer, or if it’s shorter, for the period from separation until the date the property ceases to be the other spouse’s main residence.

Planning

You can only have one main residence at any one time. Therefore, if the spouse making the transfer has since separation owned an interest in another residence which could count as their main residence, PRR for this will be lost for the period when the former marital home is deemed to be their main residence because of the s.225B election. The overall tax effect of making the election therefore needs careful consideration before committing to it.

 

How to claim

Use our letter to write to HMRC and make the claim under s.225B. You can also use the text from the letter to make the claim on your tax return (if you complete one) for the year in which you make the transfer to your former spouse. Include the text in the additional information section of the capital gains pages of your tax return. You need to make the claim within four years of the end of the tax year of the disposal.

 

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