To quote Mrs Bennett in Jane Austin's Pride and Prejudice: “It is a truth universally acknowledged that a single man in possession of a good fortune must be in want of a wife.” And, of course, vice versa in this more politically correct era. Never is this truer than with capital gains tax.
A husband and wife team has the best of both worlds for CGT purposes. They are treated as individuals. Each pays tax on his or her own individual gains effectively as a single person.
However, if they are living together, any asset transferred between them will not be treated as resulting in a gain or a loss, as would normally happen with gifts.
The recipient spouse is, therefore, treated as acquiring the asset at the deemed cost of (the original purchase price plus indexation allowance up to April 1998 plus any allowable expenditure/costs up to the transfer) See example one below.
Getting married is a useful course of action for CGT planning. However, see the cautionary tale below on how it can all go wrong.
The only exceptions to the above are where:
The couple are not deemed to be living together.
The asset transferred is trading stock
The surviving spouse acquires the asset on the death of his or her spouse
Most married couples are treated as living together unless the marriage has broken down and they are separated under a court order, a deed of separation or in circumstances which indicate that the separation is probably going to be permanent.
Just because the couple do not live in the same house does not mean that they do not live together for CGT purposes. (I am honestly not making this up). As regards the first two exceptions in the table, where an asset is transferred between couples in these circumstances, a gain is triggered on the disposer.
As a general rule, therefore, getting married is a great tax planning ploy as transfers between spouses can be used to maximise exemptions and minimise any tax payable.
There are, however, special rules dealing with death.
Story with a lesson
A married man was doing some tax planning and, on the advice of his financial adviser, passed some assets into the ownership of his spouse. The trouble was that six months after he transferred the assets, his spouse ran away with the financial adviser.
If you transfer/give assets to someone else, remember that they now own them and can do whatever they want with them. A more cautious spouse might have put the assets into joint names or under trust but hindsight is a wonderful thing.
Do not let the tax tail wag the dog.
When someone dies, assets owned by him or her are deemed to pass to the personal representatives at the date of death at their market value on that date. There is no CGT tax charge assessable on any gains, however, on the deceased.
It may take some time for the personal representatives to finalise the estate. When they do, they will either sell the deceased's assets and distribute them according to the instructions in the will or transfer them to the beneficiaries.
Assets sold by personal representatives
In this case, the personal representatives are effectively treated as having held the assets in trust. Any gains on assets sold are assessable on the personal representatives at 34 per cent. They do, however, have an annual exemption equal to the personal exemption for the tax year of death and the two following tax years.
Assets transferred to beneficiaries under the terms of the will
These are treated as though the beneficiaries had acquired them at the date of death at their market value on that date. Any future realised gains will be assessed on the beneficiary with a base cost of the market value at the date of death.
Death is a wonderful tax-avoidance measure for CGT. In most cases, effectively all CGT liability is wiped out. However, it is not something to be recommended to clients as a general rule.
Remember, too, that gifting assets assessable to CGT triggers a disposal. This may be potentially good advice for inheritance tax purposes but the worst scenario is where the gift triggers a CGT charge and the client dies within seven years of the gift.
The net effect is that both CGT and IHT could be payable. Be careful.
Unfortunately, in the current investment climate, many investors will find themselves in a loss situation if they cash in some assets. If a loss occurs, there are various rules that apply:
Neither indexation allowance nor taper relief can be used to create or increase a loss.
For 1996/97 and later years, a loss needs to be claimed within five years 10 months of the end of the tax year in which they are triggered. If you do not claim a loss within this period, the tax inspector will not allow it.
Losses must first be set against gains in the same year. This offset can reduce the gain to nothing so that the annual exemption is wasted. It is not an option to claim that only some loss be offset.
Any losses not used in the current year can be carried forward. Losses must, however, be set against gains in the current year before being carried forward.
Losses are set against gains before taper relief is applied.
Where someone dies and there are losses that cannot be used in the year of death, they can be carried back to the three years prior to death. This is the only time that losses can be carried back.
See example two below.
If claiming a loss means that some or all the annual exemption is unused, think about transferring some “gainful” assets from a spouse. These can be encashed to utilise the exemption. Remember that taper relief may also reduce the overall assessable gain.
Being married offers many possibilities of tax planning for CGT. If contemplating transfers between spouses, make sure that there is documentation to back up the transfer and ensure that the proceeds from any sale of a transferred asset are placed in the account of the spouse who owns the asset at the time of sale. Otherwise, the Revenue may regard the whole business as a mere tax planning ploy. As if.
Unfortunately, in the current financial climate, we may be more concerned with losses. Paying any tax is awful but at least payment of CGT means you have actually made a gain. We all look forward to better times ahead.
Henry, a higher-rate taxpayer, bought units in a unit trust in August 1996. The original investment was £10,000. He transferred these units to his spouse Anne in September 2002. The value of the units at the date of transfer was £15,000.
For future taper relief calculations, Anne is deemed to have owned the asset for the complete period of Henry's ownership plus her own.
Capital gain in 2002/03 £15,000
Losses triggered in 2002/03 £9,000
Net gain £6,000
£1,700 of the annual exemption is wasted as only £6,000 can be set against the net gain. The unused bit cannot be carried forward to use in a future year.