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Home sweet (free) home

Tax Telegraph, June 2013

Home sweet (free) homeFor the vast majority of people estate planning essentially means dealing with their home. To avoid losing the benefit of the main residence exemption and incurring unexpected capital gains upon inheriting a property it is important to understand the CGT rules relating to ownership, death and the main residence exemption. 

Joint or common tenancy

Scott and Tracey currently own their main residence, which they purchased in 1980, as joint tenants. They have queried whether it would be more advantageous from an estate planning perspective to hold the property as tenants in common.

The advantage of holding an interest as tenants in common is that the interest in the property can be included in the will . If it is a joint tenancy it automatically passes to the surviving tenant.

From a CGT perspective no distinction is made regardless of whether an asset is held through a joint tenancy or a tenancy in common. Individuals who hold a property as joint tenants are treated as each owning a separate CGT asset constituted by an equal interest in the asset and as holding that interest as a tenant in common. On the grounds that the conversion from one to another does not give rise to a change of beneficial ownership for CGT purposes, the transfer does not have any CGT implications.

Granting life tenancy

Let’s assume that Scott and Tracey own the property as tenants in common. Assume that Scott grants Tracey a life tenancy after he passes away. Provided the property is not sold during the period of life tenancy no CGT implications arise from the life tenancy alone. If the property is sold during this period any capital gain or loss will be ignored provided the property has been Tracey’s main residence from the time of Scott’s death to the time of disposal.

The tax implication of the life tenancy upon Tracey’s death to the ultimate beneficiary, their son Nick, is that Nick is treated as having acquired Scott’s interest in the property on the day Scott died, not when Tracey died. As a result, Scott’s ½ interest in the property is converted into a post-CGT asset at the time of Scott’s death and Tracey’s ½ interest on the day that Tracey died. As the property is a pre-CGT asset to Scott and Tracey, the first element of the cost base of the property will include the market value of the property on the day of his father’s death for half of the interest and the market value of the property on the day of his mother’s death for the other half (i.e. there will be two acquisition dates). 

Nick is deemed to have acquired ½ interests in the property on the day of Scott and Tracey’s death for the purpose of applying the 50% CGT discount.

Main Residence?

Let’s assume that the property was wholly owned by Scott and not his main residence at the time of his death, however Tracey was granted a life tenancy from the date of his death (i.e. she used it as her main residence). 

If the property is later sold by Nick the resulting capital gain or loss is ignored provided that from the time of Scott’s death to the time of disposal the property was the main residence of one or more of the following individuals (and the property is not used for the purposes of producing assessable income):

  • The spouse of the deceased (Tracey)
  • An individual who had a right to occupy the dwelling under the deceased’s will (Tracey)
  • The ultimate beneficiary (Nick).

Based on the above, so long as the property remains Tracey’s main residence subsequent to Scott’s death, there would be no capital gain if the property were sold by Nick.

New Home

If the property had been acquired by Scott and Tracey in 1990, instead of 1980, and was thus a post-CGT asset in Scott’s hands, Nick is treated as having acquired the property at the time Scott died for his cost base. For the purpose of the 12-month rule relating to the 50% CGT discount the relevant acquisition date is the date Scott acquired the property.   

In this scenario, the first element of the cost base of the property to Nick is the property’s market value on the day of Scott’s death provided the following conditions are satisfied:

  • The property was Scott’s main residence before he died
  • The property was not used for income-producing purposes at that time.

If these conditions are not satisfied, the first element of the cost base of the property to Nick is the cost base of the property to his father at the time of death.

For the purpose of the main residence exemption, any capital gain or loss arising from a disposal of the property is ignored provided the disposal occurs within 2 years of Scott’s death.

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