Married Couples Living In Two Properties - tax and financial advice from independent financial adviser (IFA) Isis Financial Planners
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for February 2010. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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- Married Couples Living In Two Properties - Principle Private Residence? - 24 February 2010
In common with other recently married older couples, we each have our own house and choose not to live together full-time. I prefer being in town while my husband prefers the country. We maintain our properties independently, so feel it is impossible to choose one main residence. Our solicitor says he does not see why we have to, but my accountant says we must nominate one or the other within two years of our marriage. Who is right?
A married couple (or civil partners) can have only one property at a time between them qualifying for the principal private residence exemption. You can either wait and tell HM Revenue & Customs whether it is your main residence when you sell, or elect one of your homes as such ahead of time. The nomination must be made within two years of marriage. That sounds restrictive but it is actually incredibly flexible. You can vary the nomination as often as necessary, and backdate it by up to two years, which could save you a considerable amount of tax.
It is a very, very good idea to do it.
You should discuss the pros and cons of which property to elect initially with your accountant.
I have been through the official guidance and nobody seems to have considered spouses living separately in their own homes. So, were either of you to sell your respective property and claim it was your primary residence, HMRC might well ask for proof.
It would want to check whether this was your "factual main residence" – where you're registered to vote and with a GP, where you work, where you have your furniture and personal belongings, the address you put on personal letters and on your tax return.
In your case, I suppose HMRC might look at where you choose to spend time together as a kind of tiebreaker. Do you visit your husband in the country or does he visit you in town?
I know that doesn't really answer your question but I'm not sure that it can be answered satisfactorily. What I can say is that not nominating a main residence would probably mean months of correspondence with HMRC and nice chunky fees for your accountant and solicitor.
My wife and I are tenants in common of a house valued at £700,000. We want to hand it over to our daughter and son-in-law while continuing to live there. However, the gift with reservation of benefit would entail paying them rent of £20,000 a year, which we cannot afford. Equally, they would like to live with us but the resultant inheritance tax bill might force them to sell when we die. Is there a way we can reduce the costs by creating a self-contained annex for ourselves (it would have to be part of the building to avoid problems with covenants)? We can reasonably expect one of us to survive for seven years from the gift.
Maggie Fleming writes:
There is a much easier way to reduce your inheritance tax liability and remain living in your home without falling foul of either the reservation of benefit rules or the pre-owned assets tax. As your daughter and son-in-law are happy to move in with you, you can take advantage of a little known exemption from the reservation of benefit rules.
You and your wife would each gift an undivided share of the house to your daughter and her husband, and they would live there with you. This would be treated as a gift without reservation provided that you and your wife do not receive any benefit. So be careful that they do not pay more than their share of household expenses or fund alterations to the property. Indeed, to be on the safe side, it may be better if you and your wife pick up the bulk of the bills.
Like any other gift to an individual, this is a Potentially Exempt Transfer (PET) and will fall out of your estates provided you both survive for seven years. HM Revenue & Customs is generally happy where up to 50 per cent of the property is gifted in this way but may question a larger proportion. Most Inheritance Tax specialists believe HMRC to be wrong on this point and that giving a larger proportion to the children (say 90 per cent) will work. But the gift of even a half share would reduce your estates by £350,000.
Paul & Ian
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