Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

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Our daughter is off to university in October. We are considering buying a flat for the duration of her stay and would appreciate your advice on the most tax-effective way of doing this.

We are assuming that if we put down £50,000 and acted as guarantors for her mortgage, the property would be in her name and as it is her sole residence, there would be no Capital Gains Tax (CGT) on any appreciation on the property when we sold it. Is this correct?

Maggie Fleming writes:

Not all parents would be happy about giving control over a valuable asset to a student child, but I assume that you have considered the possible pitfalls and are still happy to proceed. If, however, there is any danger of your daughter deciding to drop out and of selling the property in order to go backpacking for a year or two, you may wish to discuss alternative options with a solicitor.

Leaving those considerations aside, you are correct in thinking that, as long as the deeds are in your daughter's name, the flat will be considered to be her factual main residence and will be eligible for Principal Private Residence (PPR) relief on sale and therefore exempt from CGT. She can sell the property at the end of her course without paying any CGT.

You may wish to consider a two-bedroom flat. Your daughter could rent the spare room to a friend and use the income to help with the mortgage. The rent would likely be within the Rent a Room limits (rent of up to £4,250 per annum qualifies for the scheme). Even if the rent exceeded that amount, your daughter would be able to set any excess against her personal income tax allowance (£5,225 in the current tax year) - assuming that she was not earning while at university. Nor would having a lodger prejudice the availability of CGT Principal Private Residence relief on a future sale of the property.

Six months ago, my wife of 10 years left me. We own two houses, the marital home, which has equity of about £80,000 on it, and the house where her father used to live, for a peppercorn rent. In 2003 we re-mortgaged the marital home to pay off the outstanding balance on the other house. Therefore, this second house is totally mortgage-free.

My estranged wife has now moved into that house because we have been told that she must live there for at least six months so that she can claim it is as her primary residence, thereby qualifying for Primary Residence Relief (PRR) when we do sell it.

However, as the deeds to the house are in our joint names, will this situation produce the necessary qualification for PRR? Or will it qualify only her for PRR - with my 50per cent of the proceeds still being fully susceptible to Capital Gains Tax (CGT)?

Maggie Fleming writes:

The taxation consequences of separation and divorce are complex. However, the basic situation is that a married couple can have only one principal private residence between them.

Once they separate, they can each have their own residence qualifying for relief. In the tax year of separation, you could have arranged matters so that you owned the marital home wholly and your wife owned the house where she is now living. But you cannot now use the inter-spouse transfer provisions to move property between yourselves without potentially incurring a CGT charge.

If you sell or make a gift of your interest in the second property to your wife, the transfer would be deemed to be at open-market value and you would be taxed on the gain. It is unlikely but, if you owned the property prior to April 6, 1988, dependent relative relief could be available.

If your wife claims the second house as her main residence, on sale the final three years of gain on her share will be exempt. You will be taxed on your share of gain in full. On a more general note, there is a suggestion in your question that you and your wife are using the fact of your separation to obtain a tax relief. It sounds as though your wife cannot wait to "do" her six months and get out. I would point out that, despite what you have been told, there is no minimum qualifying period of six months or otherwise. To qualify, it should be your wife's intention to make the property her permanent home.