Case Study – Former Matrimonial Home

Case Study » January 28, 2022

S.225b election saves £67,000 in capital gains tax on the transfer of the former matrimonial home

Problem: Kurt and Polly married in 2001.  In July 2010, they purchased their family home, Lavender Cottage, for £525,000.  They spent a substantial amount on improvements to the property (around £200,000) and the property was now worth £1,900,000. Kurt moved out of the home in March 2016 and Kurt and Polly are now in the process of divorcing. It has been agreed that Kurt will transfer his half of Lavender Cottage to Polly.  As Kurt has not lived in the property for the whole period of time of ownership, he will not benefit from Principal Private Residence (PPR) relief on the transfer of the home.  PPR relief is a tax relief which applies to the sale or transfer of the main home. On the transfer of the property, Kurt would have a large capital gains tax liability of £67,424 and this would be payable to HMRC within 60 days of the transfer.  A copy of the computation is below.  Kurt and Polly wanted to complete the transfer of the home without incurring such a high tax charge.

Solution: We proposed preparing a report on the main home. The cost of this report is currently £1,995 plus VAT. In the report, we quantified the tax payable and reviewed Kurt and Polly’s situation to see if Kurt would be able to qualify for s.225b relief. The effect of this relief is to treat the period of absence as though Kurt had been living in the property the whole time.  The report includes a template s.225b election.  Kurt was anxious about completing the election himself and so instructed us for an additional fee to manage the election with HMRC. 

Outcome: We completed the s.225b election form and submitted it to HMRC.  HMRC wrote back to us within 4 weeks advising that the election was accepted. Kurt transferred his share of the family home to Polly and did not have to pay any capital gains tax on the transfer of the property as the whole gain was exempt (under s.225b).  Therefore, for a cost of around £2,500 plus VAT, Kurt was able to save £67,000.

Please note: Kurt and Polly are pseudonyms

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