While the Labour Party’s deputy leader, Angela Rayner, continues to be headline news, there is also a growing focus on the complicated UK tax system. The purpose of this article is not to add fuel to the fire of a political argument but to dissect the current regulations, loopholes and the often absurd complexity of taxation in the UK.
The Angela Rayner story
Angela Rayner, the MP for Stockport, bought her council house in 2007 under the right-to-buy scheme. She received a 25% discount on the property’s asking price, a saving of £26,000, buying the property for £79,000. Fast forward to 2015, and the property was sold for £127,500, which equates to a profit of £48,500. As the property was deemed her main residence, there was no capital gains tax to pay.
However, between the purchase and sale of the property, Angela Rayner married Mark Rayner in 2010. There is confusion as to whether Ms Rayner’s main residence was her own or her husband’s property, where she spent time and is said to have used on official documentation for their children.
As always, when it comes to taxation, the devil is very often in the details. While not directly addressing the above scenario, it does prompt a number of questions. There is also an additional subject regarding electoral rules and the fact that voters are legally obliged to register at their permanent address (main residence).
Taxation, marital assets and your main residence
There are specific tax rules for assets transferred between spouses and civil partners and the sale of a main residence. Under normal circumstances, the sale of an individual’s main residence is exempt from capital gains tax, as are asset/investment transfers between spouses or civil partners. So, it seems fairly straightforward, but then we have the term “living together.”
Spouses “living together” can only have one main residence, on which a sale would be free of capital gains tax. However, what if we have a scenario where a couple lives separately and has separate houses and, therefore, doesn’t “live together” in the traditional manner? Would each have a capital gains tax exemption for their main residence in this scenario?
HMRC legislation is confusing
One of the headlines regarding this situation suggests, under HMRC regulations, that spouses can only have one main residence between them. This closes the potential tax loophole where spouses can nominate a different property as their main residence and avoid any capital gains tax on a sale. However, there are situations where spouses or civil partners can be legally separated for capital gains tax purposes:-
- Under a court order
- By a formal deed of separation
- In circumstances where the separation is likely to be permanent
To make a confusing situation even worse, did you know there is no specific legal definition of the term living together? HMRC legislation points to various non-legal definitions, leading many to believe these are legally tested.
However, there is no such confusion over the term main residence, defined as:-
- A property where you spend a substantial amount of time during the period of ownership
- Personal belongings and continuity of occupation provide evidence of your permanent address
- An official residence when it comes to public records such as the electoral roll
When we say no confusion, we mean no confusion to the general public, but there is from a legal standpoint. It is possible to pursue alternative legal declarations regarding your main residence and taxation. However, as you can see above, there are a clearly defined number of conditions when identifying your main residence.
Capital gains and your main residence
As discussed above, the story of Angela Rayner, now being investigated by Greater Manchester police, seems to relate to electoral law. If it was found that Ms Rayner’s main residence was her spouse’s property, she may have broken the law, but the time limit for prosecution has already expired. That said, if there were discrepancies with the definition of her main residence, HMRC could potentially pursue her for capital gains tax on the £48,500 profit made on the sale of her property.
In many ways, this argument has become a point of principle. If deemed a second home, the capital gains tax rate for a sitting MP in 2015, on £74,000 a year, would be 28%. This equates to a £13,580 taxable profit, which, assuming Ms Rayner had not utilised her then £11,100 capital gains tax allowance, equates to a potential tax bill of £2480. When the cost of any repairs on the property is taken into account, the potential tax bill could be reduced to zero.
Until HMRC is able to define a legal term for “living together,” we may see a number of similar instances going forward.
Capital gains tax implications and divorce
After a recommendation from the Office of Tax Simplification in 2021, the UK government agreed to relax the capital gains tax rules on divorce. New legislation was brought in for disposals on or after 6 April 2023, marking a significant change.
Rules before 6 April 2023
As normal, prior to 6 April 2023, couples either married or in a civil partnership could use the nil gain/nil loss basis transfer of assets. While the partner acquiring the assets would inherit the base cost of the partner disposing of the assets, there was no tax liability on the transfer. However, if the relationship broke down and they separated the nil gain/nil loss rule would only apply until the end of the tax year in which they parted ways.
This was deemed unfair because a couple parting at the start of the tax year would have more time to organise their assets more tax-efficiently. Someone separating on 4 April would have literally one day to use the transfer between spouses, after which any transfers would be treated as a disposal – and potentially subject to CGT.
Rules from 6 April 2023
In what many view as a much fairer system of separation, HMRC introduce four new rules from 6 April 2023 onwards:-
- Parting couples now have up to 3 tax years from the tax year they separate to transfer assets under the nil gain/nil loss basis. This period could be cut short on a formal divorce if the partnership is dissolved or annulled or if they parted as part of a formal separation order.
- Where a formal divorce/separation agreement is in place, the three years can be extended as part of the arrangement.
- The nil gain/nil loss basis relief has been extended to include situations where an interest in the marital home is retained and then sold – not transferred to the other partner.
- In situations where one partner transfers their share of the marital home to the other but retains an interest in future profits, relief would again be extended and applicable, when sold, in a similar manner to that applied to the original transfer.
These changes have been welcomed in what can be very challenging situations where the immediate focus is naturally on the wider family rather than finances. Levelling the playing field also gives separating couples more time to negotiate a balanced financial settlement.
Summary
While it will be interesting to see how Angela Rayner’s story develops, the main focus of this article is on the often complex UK taxation system and confusion regarding the term “living together”. Even though HMR legislation may portray a seemingly legal definition, this is not the case, and until this is challenged in the courts, the situation is unlikely to change.
As you can see, what many may deem straightforward situations can very quickly become complex and potentially expensive. If you would like to discuss your circumstances in more detail, please feel free to call one of our team today.