No Gain, No Loss, Less Tax!

For capital gains tax (CGT) purposes, each spouse or civil partner is treated as a separate individual, and each is entitled to their own annual exempt amount. For 2015/16 this is set at £11,100, meaning that potentially a couple can realise capital gains of £22,200 before paying CGT.

Despite being treated as separate individuals, married couples and civil partners who live together are able to benefit from a special rule which allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss. Utilising this rule is an important tax saving tool to ensure not only that their annual exempt amounts are not wasted, but also that where CGT is payable, it is payable at the lowest possible rate.

Example 1 - Inter-spouse gift

Bill and Claire have been married for many years. Bill purchased a painting for £500 in 1998. The artist has recently become very popular and Bill wants to sell the painting, which is now worth £10,000.

Bill is a higher rate taxpayer. He has already utilised his CGT annual exempt amount for 2015/16.

Claire has not used her annual exempt amount for 2015/16, and is unlikely to do so.

If Bill were to sell the painting, he would realise a gain of £9,500. As he has already used his annual exempt amount, the full amount of the gain would be chargeable. As a higher rate taxpayer he would pay tax at 28% on the gain, giving rise to a CGT liability of £2,660 (28% of £9,500).

However, if Bill makes use of the no gain, no loss rule to transfer the painting to Claire, prior to sale, the painting can be sold without triggering a tax liability. Claire is treated as if she had acquired the painting in 1998 for £500. On sale, she realises a gain of £9,500, which is sheltered entirely by her annual exempt amount for 2015/16 of £11,100.

Consequently, by making use of the no gain, no loss rule, the couple can save tax of £2,660.

Tip:

Making use of the no gain, no loss rule can help to ensure that the CGT annual exempt amount is fully utilised.

Jointly owned assets

Where assets are jointly owned, gains are apportioned in accordance with the beneficial interests at the time of the disposal. So, for example, if an asset was jointly owned and the husband had a 75% share and the wife a 25% share, 75% of the gain would accrue to the husband and 25% to the wife. Using the no gain no loss rule to transfer a part share to a spouse can be useful from a tax planning perspective.

Example 2 - Transfer of an interest in a property

Tom and James are in a civil partnership. In 2005, James bought a house to let out for £150,000. He wishes to sell the house in 2015/16. The sale will realise a gain of £33,000.

James is a higher rate taxpayer. Tom is a basic rate taxpayer and has £20,000 of his basic rate band available. Neither James nor Tom has used their CGT annual exempt amount in 2015/16.

If James sells the property whilst in his sole name, he will realise a gain of £33,000 of which £11,100 will be sheltered by his annual exempt amount, leaving £21,900 in charge on which CGT of £6,132 (£21,900 @ 28%) will be payable.

However, if instead, James transfers a two-thirds interest in the property to Tom prior to sale, the result is very different. One-third of the gain (£11,000) is treated as accruing to James. This is covered by his annual exempt amount, so no CGT is payable.

The remaining two-thirds of the gain (£22,000) accrues to Tom, of which £11,100 is covered by his annual exempt amount, leaving £10,900 in charge on which CGT of £1,962 (£10,900 @ 18%) is payable.

By utilising the no gain, no loss rule, the couple can save CGT of £4,170.

Practical Tip:

The no gain, no loss rule generally allows married couples or civil partners to change ownership of assets prior to sale to minimise their combined CGT bill.