Capital gains tax ramifications of transferring a former home to spouse.

A property that a person owns and has lived in is not liable to capital gains tax. This is known as principal private residence (PPR) relief. If the owner has not lived in the property constantly, PPR relief is calculated by using the fraction: period of occupation/period of ownership. If the property has ever been the owner’s home, a final 9 months of ownership is a deemed period of ownership in calculating the PPR relief. The final 9 months is therefore added to period of occupation regardless of whether the owner lives in the property in the 9 months preceding disposal.

It is also possible to treat a period of absence as a deemed period of ownership where it is reoccupied prior to disposal. However, a property can only be deemed to be occupied for a period during the owner did not have another PPR. A person can only have one PPR at a time. For instance, any period of absence from a former home during which the person lives in a property subsequently purchased, would not be a deemed period of occupation.

There is one PPR per married couple. Where one spouse comes to own a property the other used to live in, the transferee can 'inherit' periods of ownership for the purpose of PPR.  However for this to apply, said transferee needs to be living in the property at the time of transfer. This is explained in the following link: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64950

To this extent, a married couple would potentially save tax by moving back into the former home and transferring into joint names prior to disposal. The benefit would be a possible doubling of the annual exemption and use of any of transferee spouse’s unused basic rate. Practical costs and upheaval of moving home temporarily are unlikely to be offset by tax savings.

By contrast, a pitfall would be to transfer the property while the couple are living away from the property. In this case, the property would not be transferred while the transferee spouse is living in it. Consequently, half of the principal private residence relief could be lost. Given rises in property prices in London, the cost could be significant. Since spousal transfers are exempt from tax it is possible to transfer property back into transferor’s name to restore PPR. Beneficial ownership transfers are effective for tax purposes leaving title intact