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November 20th 2020

Capital Gains Tax and the spousal transfer exemption

In the UK Capital Gains Tax (CGT) is payable when individuals or trusts dispose of certain assets for a consideration (whether in cash or in kind), or as a gift or sale at undervalue.

The rates of CGT are 10% and (for higher rate payers) 20%; an 8% surcharge is applied for gains on the disposal of residential property.

UK resident taxpayers are however allowed to make up to £12,300 of chargeable gains in the current tax year, without having to pay CGT. This is known as the Annual Exemption.

Unlike with the Income Tax Personal Allowance, the CGT Annual Exemption is available to every UK resident taxpayer – even high earners.

The transfer of assets between spouses or legal partners, however, does not result in a chargeable event (whether or not any money changes hands). In such cases, for CGT purposes the transferee simply inherits the CGT "base cost" of the transferor.

The “spousal transfer” CGT exemption presents useful tax planning opportunities; an individual who is about to dispose of a chargeable asset may often reduce the tax bill by transferring a share of the asset – or even the entire asset – to their spouse or legal partner immediately prior to the disposal to the third party.

There are several reasons why this type of planning is useful. For example:

  • it may enable the CGT Annual Exemption of the partner to be utilised, shielding more of the overall gain from any CGT;
  • it may enable a larger proportion of the overall gain to be taxed at the lower rates of 10%/ 18%, as opposed to 20%/ 28% - this will depend on the overall amount of taxable income and gains attributable to each partner, in the tax year of disposal;
  • the partner may have unutilised capital losses from the current or prior tax years that can be relieved against the gain.

Here is a simple illustration:

Pete and Ann are married. They are both higher rate income tax payers.

Pete has owned a buy to let flat in Edinburgh New Town for three years, throughout which time it has been let to a single tenant.

Pete now plans to sell the flat; he expects to realise a chargeable gain of £50,000 on sale. Neither Pete nor Ann expect to make any other chargeable disposals in the foreseeable future.

The flat has never been Pete’s private residence, so it would not attract any Principal Private Residence relief (that’s the relief that means most homeowners don’t declare or pay any CGT when they sell their home - even if they make a big chargeable gain in the process!).

If Pete sells the flat in the current tax year, he would pay CGT of (£50,000 - £12,300) = £38,700 x 28% = £10,836. The tax is payable within 30 days of completion and he must file a CGT return too.

As an alternative, Pete could potentially transfer a half share in the flat to Ann, immediately before the flat is then sold to a third party.

The transfer of a half share from Pete to Ann would not attract any CGT because of the spousal transfer exemption.

If the flat is then sold to a third party for the expected sum, Pete and Ann would EACH pay CGT of (£25,000 - £12,300) = £12,700 x 28% = £3,556.

The total tax payable between Pete and Ann would therefore be (£3,556 x 2) = £7,112 – a total tax saving of £3,724.

Admittedly, there would probably be some legal costs associated with transferring part ownership to Ann (and if the flat was mortgaged, the consent of the lender would also be required, and this may result in some additional cost as well), but the tax savings usually outweigh any extra legal costs – often by a significant sum.

If Ann was a basic rate taxpayer, the tax saving would be even greater – potentially £4,994, rather than £3,724. If she had unused capital losses, the savings could be greater still.

Great care needs to be taken with this type of planning, which should never be undertaken without specific, professional tax advice. In certain circumstances a spousal transfer prior to sale should be expressly avoided, as it can lead to the loss of valuable CGT reliefs such as Business Asset Disposal Relief, resulting in a bigger tax bill!

It remains to be seen whether the spousal transfer rules and the CGT Annual Exemption will remain in their present form in future; a review of the CGT regime is currently underway and the Chancellor may well be persuaded to reform the tax quite significantly in the next Budget (read more about that in Ryan's blog here).

If he does, we’ll bring you all the details here at Scholes Chartered Accountants. In the meantime, if you’re thinking of disposing of any significant assets, get in touch with us first.

Contact us for further information.

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