A married couple (or a civil partnership) are only allowed one “only or main residence” (OMR) between them. It is common knowledge that your OMR is exempt from capital gains tax, so in a case where a couple have more than one property, the choice of which is to be the OMR is a very important one. It is up to the couple to make the choice, and they have a two year window of opportunity to nominate which is to be the main residence from the time when the situation first arises. For example: Barney and Daisy get married. They each own their own house, so now they own two between them. Barney’s is a mews house in London, and Daisy’s is a cottage in Devon. They decide that they will keep both houses, living in London during the week, and using the Devon cottage as a weekend retreat. Both the properties are used by them as a “residence” so they have two years from the day they got married to notify HMRC which property is to benefit from the exemption for their OMR. The time limit is strictly enforced, so they should do so without delay, by writing a letter signed by both of them to their respective tax districts. Once they have nominated one house, they can then change their nomination at any time in the future, and with retrospective effect for up to two years. If, for example, they nominated the London house when they got married in January 2006, they could now choose to alter the nomination to the Devon cottage, and they could elect for this to apply from any date up to two years previously. I have written elsewhere (see the June 2006 Tax Insider) on how this can be used to effectively get the OMR exemption for more than one property at the same time, but in this article I want to deal with how to use this right to avoid a nasty trap in the rules for gifts between spouses. The exemption from CGT for your OMR depends on your having used it as such throughout your period of ownership. If you have let it out, for example, the period when it was let will not qualify for exemption from CGT. Let us suppose that when Barney and Daisy met, the Devon cottage belonged to Barney instead of Daisy, and he had let it out throughout his ownership of it. Even if he now gets rid of the tenants and they nominate it as their OMR, if he were to sell it, he would be liable to CGT on a large part of the capital gain he would make. If Barney and Daisy decide that they would prefer to have the cottage as a weekend retreat rather than letting it out, and they nominate it as their main residence, then it will still be “tainted” with the period when Barney let it out, and so there will still be CGT to pay on a sale. If Barney were to give the cottage to Daisy while it is their OMR, then the law says that she is deemed to acquire it for a value that makes no gain and no loss for Barney, but it also says that she is deemed to have owned it since Barney first acquired it, and the question of whether it was her OMR is deemed to be decided by whether it was Barney’s OMR during the period. In other words, Daisy now owns a house that is her and Barney’s OMR, but if she sells it, the gain attributable to the period when Barney was letting it will still be chargeable. This is where careful reading of the legislation pays dividends. This passing on of the spouse’s history of ownership only applies if the house is the couple’s OMR at the time of the gift to the other spouse. If it is not their OMR at that time, then Daisy still acquires it at “no gain/no loss”, but she starts afresh as far as her history of ownership is concerned. Some of you will be ahead of me by now - what Daisy and Barney should do when they marry is to nominate the London property as their OMR, and then Barney gives the Devon cottage to Daisy. Because it was not their OMR at the time of the gift, Daisy does not inherit Barney’s history of ownership. If they decide to sell the cottage, they can nominate it as their OMR before the sale, and the gain will be exempt from CGT - the last 36 months of ownership are always exempt where the property has been your OMR at any stage of your ownership of it. The previous history of letting under Barney’s ownership has been washed out. There are numerous variations on this theme, but the key point is that a gift between spouses can only wash out the previous history of the property if it is not their OMR at the time of the gift. James Bailey
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