When someone is trying to sell their property or investments, the big question is how to minimise tax and take advantage of reliefs available. There are many avenues which can be explored in order to bring down capital gains tax liability but how to make use of a spouse’s allowable losses is known the very few. We have tried to explain how you can benefit from spouse or partners unclaimed losses to bring down tax liability.
Spouses and civil partners have specific capital gains tax regulations that allow them to transfer assets between them at no gain or loss. Instead, they assume the transferor’s base cost. This can be pretty useful in tax planning to maximise annual exempt amounts and capital losses.
Before considering the yearly exempt amount, capital losses are immediately offset against gains from the same tax year. They are carried forward for relief against future gains to the extent that they are not set against capital gains in this manner.
While it is not possible to transfer capital losses to a spouse or civil partner for them to use those losses, it is possible to use the no gain/no loss rule to transfer an asset or share of an asset to a spouse or civil partner with losses before disposal, so that they can dispose of the asset (or a share of the asset) to a third party while using their unrelieved capital losses.
The following basic example demonstrates this.
Example
Dorothy and David have been married for quite some time.
Dorothy sold some shares in June 2020, incurring a capital loss of £40,000. In 2020/21, she had no further disposals.
David intends to sell a property in his own name. He paid £200,000 for the property and has received an offer of £285,000. The sale costs £4,250, resulting in a net gain of £80,750 (£285,000 – £200,000 – 4,250). The sale is anticipated to close in December 2021.
Dorothy and David are both higher-rate taxpayers.
Although Dorothy cannot transfer her losses to David, David may transfer a share of the property to Dorothy prior to sale.
David chooses to transfer Dorothy 76 per cent of the property. Her starting point for her 76 per cent share is £152,000.
Dorothy will realise a £61,370 gain on the subsequent sale, while David will realise a £19,380 gain.
Dorothy may deduct her capital losses of £40,000 and her yearly exempt amount of £12,300 from her share of the gain, leaving her with a chargeable gain of £9,070 (£61,370 – £40,000 – £12,300) for which tax of £2,539.60 is due.
David may use his yearly exempt amount of £12,300 to his share of the gain, resulting in a chargeable gain of £7,080 and a tax of £1,928.40.
By transferring the property and using Dorothy’s allowed losses and yearly exempt amount, the total capital gains tax paid is £4,522, as opposed to the £19,166 ((£80,750 – £12,300) @ 28 %) that would have been payable had David just sold the property while in his sole possession.
By Aatif Malik writer is founder of Tax Accountant | Specialist Tax Consultancy and a qualified accountant with over 20 years of experience in taxation and tax planning for individuals.
