Principal Private Residence Relief and a Late Transfer to a Spouse
Rafiq bought a flat on 6 April 2010 for £250,000, paying £8,000 in legal fees and SDLT. He lived in it as his only home until 5 April 2016 and then let it out until he sold it on 6 April 2025 for £520,000, paying £12,000 in agent and legal fees. He is a higher rate taxpayer and has no other capital gains or losses in 2025/26. Three months before exchange he is considering transferring 50% of the flat to his wife, Sofia, who married him in 2020 and has never lived in the flat, to "use her annual exemption and lower rate band". Rafiq assumes principal private residence relief covers the whole gain "because it was my home".
1. Compute Rafiq's chargeable gain and capital gains tax if he sells the flat himself, and explain the reporting deadline.
Read the worked answer
The gain
| £ | |
|---|---|
| Proceeds | 520,000 |
| Less costs of disposal | (12,000) |
| Less base cost (250,000 + 8,000) | (258,000) |
| Gain | 250,000 |
Period of ownership and qualifying months
6 April 2010 to 6 April 2025 = 180 months.
- Actual occupation: 6 April 2010 to 5 April 2016 = 72 months
- Final nine months of ownership always qualify, and the last nine months here fall inside the letting period: +9 months
- Qualifying total: 81 months
Reliefs
- PPR relief: 250,000 × 81/180 = £112,500
- Letting relief is not available. It was withdrawn for disposals after 5 April 2020, save where the owner shares occupation with the tenant - Rafiq had moved out, so there is nothing to claim.
Tax
- Chargeable gain: 250,000 − 112,500 = £137,500
- Less annual exempt amount: (3,000) → £134,500
- CGT at 24% (residential property gains; he is a higher rate taxpayer): £32,280
Reporting
He must file a residential property return and pay the tax within 60 days of completion - by 5 June 2025 - even though he is within self assessment. Missing the deadline triggers a £100 fixed penalty, daily penalties after three months and a 5% tax-geared penalty after 30 days, plus interest. The 60-day payment is not a payment on account; it is the tax itself.
His assumption of full relief is therefore wrong by a wide margin: more than half the gain is chargeable.
2. Quantify the effect of transferring 50% to Sofia three months before exchange, and advise whether it should be done.
Read the worked answer
Mechanics
A transfer between spouses living together is at no gain, no loss: Sofia takes half of Rafiq's base cost (£129,000) and is treated as having owned her half since April 2010.
The trap: PPR relief is residence-based
Each spouse's entitlement depends on their own occupation. Occupation by one spouse is treated as occupation by the other only while they are living together in the dwelling. Sofia married Rafiq in 2020 and has never lived in the flat, so her half gets:
- no PPR relief for actual occupation;
- no final-nine-month relief either, because the dwelling was never her residence at any time.
The numbers on sale
Sofia
- Share of proceeds 260,000 − share of costs 6,000 − base cost 129,000 = 125,000
- No relief; less AEA 3,000 = £122,000 chargeable
Rafiq
- 260,000 − 6,000 − 129,000 = 125,000
- PPR: 125,000 × 81/180 = 56,250 → 68,750; less AEA 3,000 = £65,750 chargeable
Tax
- Sofia at 24%: 122,000 × 24% = £29,280
- Rafiq at 24%: 65,750 × 24% = £15,780
- Total £45,060 vs £32,280 on his own → £12,780 worse
Even on the most generous assumption - that Sofia has her whole basic rate band free, so £37,700 is taxed at 18% and £84,300 at 24% - her tax is £27,018 and the family total is £42,798, still £10,518 worse than doing nothing.
Advice
The transfer destroys relief: it moves half the gain to a person with no PPR entitlement in exchange for one extra annual exemption (£720 at 24%). It should not be done. The message to Rafiq: relief follows occupation, not ownership, and a transfer after the occupation has ended cannot manufacture it.
3. Would your advice differ if Rafiq had never lived in the flat and had bought it purely to let? Explain the reasoning and any conditions.
Read the worked answer
Yes - the answer reverses.
If the flat had never been his residence, there would be no PPR relief to lose. There would only be a gain of £250,000 (same computation) and a single annual exemption of £3,000. Splitting ownership between two spouses would then give:
- two annual exempt amounts (£6,000 in total) rather than £3,000 - a saving of £720 at 24%; and
- access to Sofia's basic rate band: up to £37,700 of her share could be taxed at 18% rather than 24%, saving up to £2,262, depending on her other income.
Potentially £2,000–£3,000 of tax, which is worth doing where the transfer is straightforward.
Conditions and risks
- The transfer must be a genuine, outright, unconditional disposal of the beneficial interest, effected before exchange of contracts (normally by deed/TR1). A transfer that is merely a device, or that is undone after the sale, is vulnerable to challenge and could be recharacterised.
- Sofia must be living with Rafiq at the time of transfer for the no gain/no loss rule to apply; separation changes the analysis.
- Each spouse then has their own 60-day reporting and payment obligation for their own share of the residential property gain.
- The gain must be genuinely the transferee's - if the sale proceeds are routed back to Rafiq, expect HMRC to look through it.
So the same planning step is value-destroying in one fact pattern and mildly beneficial in another; the deciding question is always whether there is PPR relief to forfeit.