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CGT on Sale of Property with Transfer into Joint Ownership

Shortly before you sell a property, could you transfer it into joint ownership to save on Capital Gains Tax? And if so, what are the chances of the Taxman attacking this as a tax avoidance scheme to restore his tax take?

Classic advice
Problem. The 100% exemption from Capital Gains Tax (CGT) only applies to your main residence, therefore a second or subsequent property will be subject to CGT if you make a profit when you dispose of it. If this gain is less than your annual CGT exemption, currently £10,600 (2012/13) then there will be no tax to pay. However, you’re probably hoping for a better return than this from your investment in property. Unfortunately the CGT rate quickly climbs to 28% (from 18%) if you already have income or gains from other sources. So how can you make sure you keep more of your profit on selling a property?

Classic solution. The existing CGT rules enable spouses to plan in advance and make appropriate transfers of assets (including property) one to another at no-gain, no-loss for CGT, before disposals. Therefore you would transfer, say 50%, of the property to your spouse prior to a sale so that 50% of the anticipated gain ends up on their tax return not yours. This would allow another annual exemption against the gain and hopefully taxing some of it at the lower CGT rate of 18% if your spouse is a lower rate taxpayer in the tax year in which the disposal is made.

Taxman’s attack
Likely scenario. A transfer into joint names is made three months before the eventual completion of a sale. The proceeds of the sale are shared between the spouses and shown on their separate tax returns.

Tax avoidance. Anecdotal evidence suggests that the Taxman is currently likely to contend that the gain should be returned in full on the first spouse’s tax return, on the basis that the primary motive for the transfer was to gain a tax advantage and, as such, should be ignored.

Problem. Completion normally takes place a month after exchange of contracts, which in turn is likely to be one month after the actual purchase, has been identified and solicitors instructed. The estate agent is likely to have taken some weeks to produce the purchaser. The transfer took place after the property was placed on the market!

Tip. If you wish to engage in this form of tax saving, the property transfer into joint names must precede the property being placed on the market by a material period of time. Preferably in the tax year preceding the one in which the exchange of contracts takes place.