For better or worse off – how marriage can affect tax position
THERE is a sometimes complex inter-action between the tax rules on private houses and marriage or civil partnership.
It is fairly well-known that you can sell your private home without paying tax on any profit that you make. This is the “main residence exemption”, and is a generous relief when compared with the tax rules in other countries. Even more generous is the fact that, when you buy a new house, the tax exemption continues to apply on the old house for three years.
So what happens in the case of a married couple, or a couple in a civil partnership? The basic rule is that a married couple, or civil partners, can only have one main residence.
These days, as people marry later in life, it is increasingly likely that a couple will already have a home each. They may decide to sell one house, in which case the seller will have a tax-free gain, so long as the sale is within three years of the marriage.
The couple may, as an alternative, decide to keep both houses and use one as a second home. They then have to make a decision on which house is to be treated for tax purposes as their main residence. As long as they do in fact use both houses to live in, a couple can choose which house will qualify for the tax exemption. The deadline for doing this is two years from the date of the marriage.
Once you have made the choice, however, you can alter that choice at any time to specify (or “nominate”) the other property for the tax relief. When combined with the rule extending the exemption for three years up to the date of sale, this can create some valuable tax-saving opportunities.
For example, Tom and Viv get married in November 2010. Both have houses that they have owned for a few years. They decide to live in Tom’s house, but to keep Viv’s house as a second home. They nominate Viv’s house as their main residence for tax purposes.
Then they change the nomination a week later, to specify Tom’s house. If they sell Viv’s house by November 2013, any profit they make is tax-free, regardless of the fact that they are also accruing tax-free gains on Tom’s house at the same time. They can even let Viv’s house out in those three years without losing the exemption, though they will pay tax on the rental income.
Talking of rental income, ideally this should belong to the person with the lower level of income if that means it is taxed at a lower rate.
The rule here, on jointly-owned property, is that the income is taxed 50:50 unless the actual ownership is different from that, and the couple notify HM Revenue & Customs of the actual ownership.
It may be best to make sure that one party has outright ownership of the property concerned.
If a couple separates, one party is likely to sell his or her half share to the other and move out. If the sale is before April 5 (the end of the tax year) and before the decree absolute, then there will be no tax to pay. However, if the sale is any later than that, then the party who is selling the half share may have a tax liability. Note that a transfer under a Court Order counts as a sale here.
There are rules to allow the tax exemption to continue beyond the end of the tax year and after the decree absolute, but only if the seller doesn’t nominate another house as his or her main residence. This is a complex area, and early professional advice is recommended.
Adrian Widdowson is a tax adviser at Garbutt and Elliott, which has offices in Leeds and York www.garbutt-elliott.co.uk
CHOICES: Couples must specify a property as main residence.