The CGT Consequences of Asset Disposals Between Spouses
This article discusses an area that often comes up in the CII multiple-choice and written exams: the capital gains tax consequences of disposals between spouses and civil partners – of interest to those studying for any of the CII AF1, AF2, AF4, AF5, CF1, J03, R03 or R06 exams.
This article is relevant to examinable tax year 2018/19.
In this article, we will use the term ‘spouse’ to refer also to civil partners. We often see disposals between spouses described as ‘tax-free’, but the accurate term is a ‘no gain, no loss’ disposal. It is true that there’s no chargeable gain on the transfer when it’s made, but when the asset is eventually disposed of, the acquisition cost used is the one to the original spouse. In other words, the gain is simply deferred onto the second spouse.
There are good reasons for transferring assets between spouses, not least to use both CGT annual exempt amounts as well as when one spouse pays CGT at the higher rates of 20% or 28% and the other pays CGT at the basic rates of 10% or 18%.
Living Arrangements at the Time of Transfer
The thing to watch out for in any exam question is whether the spouses are living together at the time of the transfer – in fact, they only have to be living together at some point during that tax year for the transfer to be treated in the way described above.
If a disposal occurs AFTER the tax year of separation any chargeable gain is taxable and HMRC would use market value instead of the actual proceeds as the couple will still be deemed to be ‘connected persons’.Reading about asset disposal between spouses and its #CGT implications Click To Tweet
No Gain/No Loss Disposal Applies During the Year of Separation
Let’s just go over that again; the no gain/no loss disposal only applies during the tax year in which a couple separates NOT until they are actually divorced. Once a couple is divorced, they are no longer considered ‘connected persons’ (unless they are connected for reasons such as they are business partners) and any transaction between them takes place at the value they have agreed.
Tax probably isn’t the first thing on a couple’s mind when they are splitting up, but if it was, then they would do well to separate at the beginning or early on in a tax year to give the maximum amount of time for transferring assets on this no gain/no loss basis.
The type of asset that is potentially chargeable to CGT includes second homes, shares, unit trusts, investment trusts and OEICs; the marital home would normally be exempt as are ISAs, fixed interest investments and cash.
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