For bet­ter or worse off – how mar­riage can af­fect tax po­si­tion

Yorkshire Post - Property - - PROPERTY - Adrian Wid­dow­son

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.

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