ATXP6 UK
Syllabus A2. Chargeable gains A2b. The scope of CGT

A2bi. Transfers between husband and wife or civil partners

Syllabus A2bi)

Determine the tax implications of independent taxation and transfers between spouses

Don't pay CGT if:

You transfer the assets to your husband or wife or civil partner.

  • If a husband transfers an asset to his wife, she would be treated as though she acquired the asset on the same date and at the same cost as husband did.

Illustration:

On 01/05/2006 a man acquires a piece of land for £10,000. 

On 01/05/2018 he transfers it to his wife when the market value of the land is £80,000.

  • Will a capital gain be assessable on the husband?

Solution:

The wife would be treated as though she acquired the asset on 01/05/2006 for £10,000. 

Therefore, this transfer would have been made at no gain/no loss and no capital gain would be assessable.

Illustration:

What if this man made the same transfer to his daughter?

  • Will a capital gain be assessable on the daughter?

Solution:

A capital gain would arise on the father:

  • Sale proceeds (deemed to be market value) £80,000

  • Cost  (£10,000)

  • Capital gain £70,000

  • Annual exemption (£11,700)

  • Taxable gain £58,300

  • Note: As the father made a gift to the daughter and no sale proceeds were actually received, the market value of the land will be considered to be the value that the asset is sold for. 

    You will see the treatment of gifts in C2a

Why is this treatment beneficial?

This treatment is beneficial if one spouse does not have any capital gains and is a basic rate taxpayer.

  • It would be wise to transfer the chargeable asset to this spouse so that they can fully utilize their annual exemption and pay capital gains tax at the lower rate of 10% since their basic band is not fully being used (unless it is a residential property, then the lower rate is 18%).

  • IF the asset stays with the spouse who is a higher rate payer and already has capital gains, then an annual exemption allowance would be wasted and capital gains tax would be paid at 20% (unless it is a residential property, then the higher rate is 28%).

Illustration:

Greg owned a piece of land bought on 01/06/2010 for £40,000. 

For the tax year 18/19, he has taxable income of £50,000 and already has net capital gains of £20,000. 

He wants to sell this piece of land for sale proceeds of £65,000.

  • Greg’s wife is a housewife and does not have any income or capital gains of her own. 

    He thinks that it is wise to transfer the asset to his wife and let her sell it.

  • What amount of tax will Greg save if he does this?

Solution:

Without transferring the asset to his wife:

  • Net capital gains £20,000

  • Gain on land (W1) £25,000

  • Net capital gains £45,000

  • Annual exemption (£11,700)

  • Taxable gains £33,300

  • Capital gains tax payable at 20% = £6,660

  • The CGT payable specifically on the land is = 20% * £25,000 = £5,000

W1:

Disposal proceeds £65,000

  • Cost (£40,000)

  • Net capital gain £25,000

  • Why is CGT payable at 20% and not 10%?

  • This is because he has used his entire basic rate band up with his taxable income. (Explained inTopic: The treatment of capital gains)

Transferred the asset to wife and she sold it:

Disposal proceeds £65,000

  • Cost (£40,000)

  • Net capital gain £25,000

  • Annual exemption (£11,700)

  • Taxable gain £13,300

  • Capital gains tax is payable at 10% because this taxable gain falls entirely into the basic rate band = £13,300 * 10% = £1,330

Savings:

CGT paid by husband on the piece of land: £5,000

  • CGT paid by wife on the land: £1,330

  • Saving: £3,670