Several tax concessions that are available to married couples and civil partners recognise that financial affairs may be linked.
One concession relates to the transfer of assets between spouse’s and civil partner’s for capital gains tax purposes. The disposal of this asset is deemed to not provide a profit or loss, meaning that the recipient of the assets does not end up facing a capital gains tax charge, instead they assume the partner’s base cost.
How can I make good use of the capital gains tax inter-spouse exemption?
Imagine that Robert and Kevin have been civil partners for several years. Kevin is a higher rate taxpayer and Robert is a basic rate taxpayer.
Kevin also has portfolio of shares, which he now wants to sell for £30,000 profit. Both partners have not used their 2019/20 annual exemption of £12,000 and they want to sell the shares before the end of the 2019/20 tax year.
After deducting the annual exempt amount, a chargeable gain of £18,000 will be taxable at 20% as he is a higher rate taxpayer, resulting in a £3,600 capital gains tax bill.
Instead, Kevin should retain his £12,000 annual exempt amount (removing any charges) and transfer the remaining £18,000 to Robert. Kevin would be left with a chargeable gain of £6,000 (£18,000-£6,000) after deducting the £12,000 annual exempt amount. Since Kevin is a basic rate taxpayer, the £6,000 is taxed at 10%, resulting in a capital gains taxation bill of £600.
As you can see, this has saved Robert and Kevin £3,000.
What can be done with jointly owned assets?
Peter and Kelly are married and jointly own a property that they rent out to tenants, receiving £20,000 in rental income per year. Kelly is a higher rate taxpayer while Peter earns around £14,000 per year from his start-up business.
The income is split, meaning each partner receives £10,000 income per year. Kelly will pay 40% tax (£4,000 per year), whereas Peter will pay the basic 20% rate (£2,000 per year). In total, £6,000 tax is paid on the rental income.
If the inter-spouse exemption is fully utilized, Kelly can transfer her shares of the property to her husband, Peter. This will result in Peter receiving all the rental income, taxed at 20%, reducing the overall tax bill to £4,000, saving the couple £2,000 per year!
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