As a property owner, you might have considered whether transferring ownership of a property to your spouse could be a smart financial decision. The answer, for many couples, is often a resounding yes, especially when factoring in potential tax savings. Married couples and civil partners enjoy unique tax benefits that make transferring property between spouses an appealing option. However, it’s not without its complexities. Let’s dive into the potential benefits, pitfalls, and key considerations of transferring property to your spouse.
Capital Gains Tax and Inheritance Tax Benefits
One of the primary reasons married couples (or civil partners) explore transferring property between one another is to minimise Capital Gains Tax (CGT) and Inheritance Tax (IHT) liabilities.
CGT is a tax on the profit earned when you sell an asset that has appreciated in value. Fortunately, transfers between spouses are usually exempt from CGT, meaning that if you transfer a rental property or another asset to your spouse, there’s no immediate tax liability.
Example: If a wife transfers a rental property to her husband, the transaction is treated as a ‘no gain, no loss’ event for tax purposes, as long as they are living together at the time of the transfer.
The benefit extends further when considering the income tax implications. If your spouse is in a lower income tax bracket, transferring the property may result in a reduced tax bill on rental income. Suppose the husband in our example is a basic-rate taxpayer, whereas the wife is a higher-rate taxpayer. In such a case, rental income that was previously taxed at 40% could now be taxed at 20%, depending on your spouse’s total income.
From an Inheritance Tax (IHT) perspective, transfers of assets between spouses are also generally exempt, whether the transfer is made during your lifetime or as part of your estate after death. This means that transferring property to your spouse could be an effective way to reduce the potential IHT burden on your family, ensuring more of your estate is passed on to beneficiaries without being eroded by taxes.
Doubling Your CGT Allowance
If you are planning to sell a property in the future, transferring it to your spouse beforehand could further minimise your tax liability. By doing so, you can take advantage of both your personal Capital Gains Tax allowances, effectively doubling your yearly CGT allowance as a couple. For the 2024/25 tax year, the annual CGT exemption is £3,000 per person. If both spouses are entitled to claim this exemption, a couple could protect £6,000 of any capital gain from tax.
This strategy works particularly well when the transfer is a genuine, outright gift. The combined allowances can significantly reduce the amount of tax payable upon the eventual sale of the property, allowing you to keep more of your profits.
Beware of CGT on Non-Spouse Transfers
It’s important to note that these tax exemptions apply only to transfers between spouses or civil partners. If you were to transfer a property to another relative, such as a sibling, or a partner you’re not married to (including common-law spouses), the transaction would be treated as a sale for CGT purposes. The market value of the property at the time of transfer would be used to calculate any capital gain, potentially resulting in a tax bill.
In such cases, HMRC views the transaction as if you had sold the property on the open market, even if no money changes hands. Therefore, it’s critical to seek professional advice before transferring property outside of a marriage or civil partnership, as the tax consequences can be significant.
Stamp Duty Pitfalls: What You Need to Know
While Capital Gains Tax and Inheritance Tax exemptions make transferring property between spouses attractive, Stamp Duty Land Tax (SDLT) is another factor to keep in mind. Many assume that because transfers between spouses are tax-efficient in other areas, they are also exempt from SDLT. This isn’t always the case.
Stamp Duty is generally based on the ‘consideration’ involved in a transaction. In simple terms, consideration is the value exchanged in return for the property. If no money changes hands, and there is no mortgage on the property, SDLT may not be payable. However, if there is an existing mortgage on the property and the new owner (the transferee spouse) assumes responsibility for it, the value of that mortgage could be considered when calculating SDLT liability.
For example, if the property has an outstanding mortgage of £300,000 and the spouse assumes responsibility for it after the transfer, this amount would count as consideration. Depending on the value, SDLT could then become payable, even though no money was exchanged in the transfer.
It’s also important to consider the threshold for SDLT. As of 2024, the SDLT threshold is £250,000 for residential properties. If the consideration (including any mortgage) exceeds this threshold, SDLT will be payable at the applicable rate. For first-time buyers, the threshold is higher, at £425,000, but this applies only to purchasing new properties, not transfers between spouses.
Principal Private Residence Relief
If the property in question is your main residence, you may currently benefit from Principal Private Residence (PPR) relief. This is a tax relief that exempts the sale of your home from CGT, provided it was your primary residence throughout the ownership period. For transfers between spouses after April 2020, the recipient also takes on the transferor’s ownership history. Where there have been transfers before this date, great care is needed before taking any action to prevent adverse tax consequences. Please take specific advice.
Other Key Considerations
In addition to tax savings, there are other factors you should take into account when transferring property to a spouse. These include:
- Legal Ownership and Rights
Transferring property will change the legal ownership, and this could impact both spouses’ rights in the event of divorce or separation. If the property is a significant asset, you may want to consider how it will be treated in any future divorce settlement. - Mortgage Implications
If there is a mortgage on the property, your lender will need to be informed of the transfer, and they may require both spouses to meet certain criteria before approving the transfer. In some cases, transferring the property could affect the terms of the mortgage or trigger early repayment charges. - Future Property Sales
If you plan to sell the property after the transfer, any capital gain will be calculated based on the original purchase price, not the value at the time of transfer. This could have implications for CGT planning down the line. - Tax Rates
Always consider the overall tax position of both spouses. While transferring property to a lower-rate taxpayer spouse might save on income tax now, it’s important to consider how future changes in income, property values, or tax rates might affect your financial situation.
Get Professional Advice
Property transfers between spouses can offer significant tax advantages, but are not without their complications. It’s essential to get tailored advice from a professional who understands both your financial situation and the relevant tax laws.
How CRM Can Help
If you’re thinking about transferring a property to your spouse and want to explore how this might impact your tax liabilities, we’re here to help. Our team of expert accountants can guide you through the process and ensure you make the most informed decision possible.
At CRM Accountants, we do more than handle your accounts and tax returns. We work with you to maximise earnings, ensure compliance, and support your business’s growth. With expert guidance and a focus on what truly matters, we help you gain better control over your business, work-life balance, and financial future.
Next steps
For guidance and personalised support with your finances, you can count on CRM. Fill out our contact form or call us at 01865 379272. We’re here to simplify your financial journey.
