Principal Private Residence Relief – tips & traps in relation to marriage & civil partnerships

Following on from our recent article outlining the main criteria for PPR, it is important to be aware of how this relief can be accidentally lost on the occasions of marriage, civil partnership, divorce, and dissolution. Careful planning can ensure that this does not happen.

Married Couples and Civil Partners

Before marriage or civil partnership, each individual has their own main residence, whereas afterwards they have only one between them.

What happens if a couple decides to keep both of their former properties in their own names?

If both properties continue to be used as residences, the couple can jointly elect which of the two is the main residence on which PPR will be available. It makes sense to make the election in favour of the property that might give rise to the largest capital gains tax liability on sale and some thought should be given to this at the time.

What happens if an individual decides to transfer an interest in their former property to their spouse or civil partner?

This is best demonstrated by way of an example. Jack buys a property in September 2015 for £100,000 and uses it as his main residence. In September 2021 he marries Jill and transfers the property to her. They continue to use the property as their main residence until September 2024, when it is sold for £200,000.

Jill inherits Jack’s ownership & use history and so she is treated as having owned the property for 8 years and having used it as a main residence for the same period. PPR is therefore available on 8/8 of the capital gain arising which means no CGT is payable.

Stephanie Swan
Author, Stephanie Swan

Compare this to the position if Jack had not moved into the property until 2020. Jill’s ownership period would still be 8 years but the main residence use period is now 3 years. Jill would be assessed on 5/8 of the capital gain arising. Jill also inherits Jack’s acquisition cost and so the capital gain assessed on her would be £62,500.

If Jack had transferred the property to Jill before marriage, she would have had a base cost equivalent to the value at the time of transfer and her ownership period would have commenced on that same date. This would reduce the non-exempt portion of Jill’s gain. The flip-side is that Jack may have had a CGT liability as a result of the gain and it is therefore advisable to consider the position prior to marriage or civil partnership.

What happens in the event of separation or divorce?

Where a couple formally separates, the individual who stays in the family home is eligible for PPR. Provided the other party meets certain criteria, they may also claim PPR for the period to disposal. The provisions surrounding this changed in April 2023 and disposals made before that date are subject to different rules.

What if the former marital home is not sold straight away?

Often after divorce, the remaining party stays in the home for a number of years. If so, a deferred sale agreement can be drawn up at the time of divorce to the effect that the leaving party will receive a share of the proceeds of the eventual sale.

PPR will be available on the related capital gain arising if:

  • the marital home was the leaving party’s main residence immediately before separation,
  • a deferred sale agreement was put in place at the time,
  • the remaining party uses the property as a main residence up to sale, and
  • the leaving party has not elected for any other property to be their main residence in the interim.

Whilst these provisions are intended to allow the leaving party to maintain PPR on their former home, it is worth considering whether it might be better for the leaving party to make an election on a different property.

The point to take away is that careful thought should be given to making property transfers and main residence elections ahead of marriage or civil partnership and in the event of separation. We would be happy to provide advice and prepare calculations to assist you in making tax-efficient decisions.

Photo by Sandy Millar on Unsplash

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