Compare this with the situation of an unmarried couple who, with two properties, may each elect that one of the properties should be their principal private residence.
In many separations and divorces, it is not unusual for one of the spouses to leave the matrimonial home even though they retain an interest in it. This position could continue for many years and during those years there may be a possibility of reconciliation. The 36-month end-of-ownership provision may help if, at a time not beyond the end of 36 months, the property of the person who is not using it as a residence is sold. However, where this position continues beyond 36 months, this could give rise to problems.
Extra-statutory concession D6 provides that where a married couple separate and one partner ceases to occupy the matrimonial home and, subsequently, as part of any financial settlement, disposes of the home or an interest in it to the other partner, the home may be regarded for the purposes of capital gains tax relief as continuing to be the residence of the transferring partner from the date that his or her occupation ceases to the date of the transfer, provided that it has been the other partner's only or main residence throughout this period.
This is highly valuable. The extra-statutory concession will only operate, however, where the interest in the property is transferred from one partner to the other partner and the transferring partner has not elected during his or her period of absence for some other house to be his or her main residence. It will not apply on a sale to a third party.
Where there is a sale following divorce, the couple having remained in physical occupation until sale, then the principal private residence relief will be available.
Where this is not the case, that is, one party leaves the home but retains an interest, then the position is a little more complicated.
Where each of the couple jointly own the property
If the property is sold outside the three-year permitted period, then, while the occupier's gain would be fully relieved, a proportion of the gain of the non-occupier (related to the period of ownership, after the three-year period, during which the disposer did not occupy the property) would not be relievable.
Where the departing or non-occupying party owns the property
If the sale is made outside the three-year period following departure, then a proportion of the gain would not be relievable.
For example, if the total ownership period were 15 years and occupation had lasted for 10 years, 10 plus three years (the period for which the residence is treated as the main residence) would be qualifying and two years would be non-qualifying. This would mean that twofifteenths of the gain would not be relievable.
Rented property is not eligible for relief from capital gains tax. However, careful planning can reduce any tax charge that may arise.
Buy-to-let has been popular in recent years as a form of investment. With house prices rising, there are many owners sitting on substantial gains. When the property is sold, the owner could face a big tax bill. So what can be done to reduce this prospective bill?
Live in the property. If the owner has lived in the property as his only or main residence at any time, the gain referable to the last three years of ownership is free from capital gains tax.
If the property was owned for a total of four years but the owner lived there for the first year only, no capital gain would be chargeable as the gain referable to the last three years' ownership would be fully relieved.
Further, up to £40,000 of any gain not qualifying for main residence relief can be relieved through letting relief. But note that letting relief only applies to those who have lived in the property at some time. The capital gain throughout the period of ownership is treated as accruing evenly during that period and the amount of letting relief available is the smaller of £40,000 and the amount of the gain relieved under the main residence provisions.
For example, if a gain of £80,000 arises and the gain applicable on the let part is £48,000 while £32,000 is relieved under the main residence provisions, the additional letting relief will be limited to £32,000, which will leave a gain of £16,000 to be charged.
Transfer part of the property to a spouse. This will allow him or her to use their annual capital gains tax exemption, currently £7,900, as well as the original owner's.
Keep records of the cost of home improvements as these can be added to the cost when calculating the capital gain.
Non-business assets taper relief may also be available to reduce the gain. Forty per cent of any gain after all the reliefs mentioned above (but before the annual exemption) will be relieved if the property has been owned for 10 years.
The gain is reduced by 5 per cent after three full years of ownership, with further 5 per cent increments for each successive year up to year 10.