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There are various tax savings available, despite the fact that spouses and civil partners are taxed independently from one another. One of these is the potential for married spouses or civil partners to transfer assets to one another at a valuation that, for the purposes of capital gains tax, gives rise to neither a gain nor a loss.
When it comes to tax preparation, this may be extremely helpful information to have.
The rule of no gain, no loss
According to the no gain/no loss rule, the value of an asset is considered to remain the same when it is transferred from one spouse to another since the base cost of the transferor is considered to be the item’s worth. This is the case regardless of whether there is any genuine consideration and the quantity of that consideration that is being taken into account. In contrast to other transactions that take place between linked parties, the rule of market value is not applicable here.
Because of this rule’s application, any gain that has been accumulated during the time that the transferor has possessed the asset is transferred to the transferee, and the transferor is not responsible for paying tax on that gain. The gain does not become tangible until the asset is sold outside of the married or civil partnership status it was acquired under.
Example
In 2013, Peter spent a total of 6,500 pounds on a painting. In the year 2018, he transferred the painting to his wife Pauline as a wedding present. The cost of the painting was estimated to be £9,000 at the time. In August of 2022, Pauline was successful at auction in selling the painting for £12,000.
In the year 2018, when Peter gave the painting to Pauline, its worth was considered to be transferred at the rate of 6,500 pounds. This is the initial cost of Peter, and it is the value that does not result in a profit or a loss in any way. Pauline estimates that Peter will cost her a base amount of 6,500 pounds. There is no requirement for Peter to pay any capital gains tax on the increase in value of £2,500 that occurred during his ownership of the property.
When Pauline sells the painting in 2022, the government gets its hands on the entire gain of £5,500 (£12,000 minus £5,000). Pauline is responsible for paying the whole gain, not just the increase in value that has occurred since she first purchased the painting. Pauline does not realise any more gains throughout the tax year, and the gain that she did realise is shielded by the yearly exempt sum. Pauline would have been able to gain from the loss in value if the painting had dropped in price to an amount lower than £6,500.
Various possibilities for tax planning
This rule paves the way for a number of options for tax planning.
1. Take advantage of any unused yearly exemption amounts
It is possible to gain access to the unused yearly exemption amount of a spouse or civil partner by transferring an asset or a share in an asset prior to the asset’s disposal. In the fiscal year 2022/23, the yearly exempt amount is set at £12,300. If the couple implements this strategy, they can reduce their taxable income by up to £2,460 (based on a total of £12,300 multiplied by a tax rate of 20%) or by up to £3,444 (based on a total of £12,300 multiplied by a rate of 28%) for gains on residential property.
2. File your taxes in a lower tax bracket if you can.
When a gain cannot be entirely sheltered by available yearly exempt amounts, the no gain/no loss rule can be used to share the chargeable gain so that it is taxed at the lowest rate of tax. This is possible if spouses or civil partners have different tax rates. Taking this path might, for instance, result in a reduction in the amount of tax paid on some or all of the gain from 20% to 10%, or, in the case of gains on residential property, from 28% to 18% of the original rate.
3. Adjust the distribution of the income
Unless an election is made using Form 17, income taxed by assets owned jointly by married spouses and civil partners is subject to taxation at an asset of 50 per cent each, regardless of the actual ownership shares of the individuals involved. However, in order to ensure that income is taxed at marginal rates that are as low as they possibly can be, the no gain/no loss rules can be utilised to change the underlying ownership to the desired shares. This will ensure that income is taxed at the lowest possible rates. After that, an election can be made using Form 17, which will result in the individuals being taxed on the income by reference to the shares they own.
4. Get access to asset relief for the disposal of business assets
Business asset disposal relief allows for a reduction in the rate of capital gains tax to 10% on gains that qualify for the reduction, with a lifetime limitation of £1 million. There is a separate cap that applies to each spouse or civil partner. Prior to the disposal of the business or its shares, assets or shares can be transferred from one spouse or civil partner to the other in order to gain access to the limit that pertains to each partner. However, remember in mind that the conditions must be met for a period of two years prior to the disposal, which means that forward planning is required.