Make use of the capital gains tax inter-spouse exemption

There are a number of tax concessions available to married couples and civil partners which recognise that their financial affairs may be interlinked. One of these concessions relates to the transfer of assets between spouse and civil partner for capital gains tax purposes.

The disposal is deemed to take place at a value which gives rise to neither a gain nor a loss. This means that the spouse or civil partner making the disposal does not end up with a capital gains tax bill; the spouse or civil partner acquiring the asset simply takes over his or her partner’s base cost. This rule can be very useful from a tax planning perspective as the following case studies show.

Case study 1

Emma and James have been married for a number of years. Emma has built up a portfolio of shares, which she wishes to now sell so that the couple can take a mid-life gap year. The sale of the shares will realise a gain of £30,000. Emma is a higher rate taxpayer and James is a basic rate taxpayer. Neither has used their 2019/20 annual exemption and the intention is to sell the shares before the end of the 2019/20 tax year.

The annual exemption for 2019/20 is set at £12,000.

If Emma simply goes ahead and sells the shares, she will realise a chargeable gain of £18,000 after deducting the annual exempt amount. As a higher rate taxpayer, the gain will be taxed at 20%, giving rise to a capital gains tax bill of £3,600.

However, if Emma and James make use of the inter-spouse exemption to transfer shares which would otherwise give rise of a gain of £18,000 to James, the position is very different. Emma is left with a gain of £12,000 which is covered by her annual exempt amount, leaving nothing in charge. James, however, is left with a chargeable gain of £6,000 (£18,000 – £6,000) after deducting his annual exempt amount. As the gain falls within his basic rate band, it is taxed at 10%, resulting is a capital gains tax liability of £600.

By making use of the inter-spouse exemption, the couple’s combined capital gains tax bill is reduced by £3,000.

Case study 2

Max owns an investment property jointly with his civil partner Ross. The property is let and the couple receive rental income of £20,000 a year. Max is a higher rate taxpayer, whereas Ross is in the process of setting up a photography business and earning around £14,000 a year.

Each civil partner is deemed to have received rental income of £10,000 a year. Max pays tax of £4,000 (£10,000 @ 40%) on his share, while Ross pays tax of £2,000 (£10,000 @ 20%) on his share. The total tax paid on the rental income is therefore £6,000.

By making use of the inter-spouse exemption, Max transfers his share of the property to Ross. As a result, Ross receives all the rental income, which is now all taxed at 20%, reducing the tax bill to £4,000, saving the couple £2,000 a year.