Example 1 - Inter-spouse gift
Bill and Claire have been
married for many years. Bill purchased a painting for £500 in 1998. The artist
has recently become very popular and Bill wants to sell the painting, which is
now worth £10,000.
Bill is a higher rate
taxpayer. He has already utilised his CGT annual exempt amount for 2015/16.
Claire has not used her
annual exempt amount for 2015/16, and is unlikely to do so.
If Bill were to sell the
painting, he would realise a gain of £9,500. As he has already used his annual
exempt amount, the full amount of the gain would be chargeable. As a higher
rate taxpayer he would pay tax at 28% on the gain, giving rise to a CGT
liability of £2,660 (28% of £9,500).
However, if Bill makes use
of the no gain, no loss rule to transfer the painting to Claire, prior to sale,
the painting can be sold without triggering a tax liability. Claire is treated
as if she had acquired the painting in 1998 for £500. On sale, she realises a
gain of £9,500, which is sheltered entirely by her annual exempt amount for
2015/16 of £11,100.
Consequently, by making
use of the no gain, no loss rule, the couple can save tax of £2,660.
Tip:
Making use of the no gain, no loss rule can help to ensure that the CGT annual exempt amount is fully utilised.
Jointly owned assets
Where assets are jointly owned, gains are apportioned in accordance with the beneficial interests at the time of the disposal. So, for example, if an asset was jointly owned and the husband had a 75% share and the wife a 25% share, 75% of the gain would accrue to the husband and 25% to the wife. Using the no gain no loss rule to transfer a part share to a spouse can be useful from a tax planning perspective.
Example 2 - Transfer of an interest in a property
Tom and James are in a
civil partnership. In 2005, James bought a house to let out for £150,000. He
wishes to sell the house in 2015/16. The sale will realise a gain of £33,000.
James is a higher rate
taxpayer. Tom is a basic rate taxpayer and has £20,000 of his basic rate band
available. Neither James nor Tom has used their CGT annual exempt amount in
2015/16.
If James sells the
property whilst in his sole name, he will realise a gain of £33,000 of which
£11,100 will be sheltered by his annual exempt amount, leaving £21,900 in
charge on which CGT of £6,132 (£21,900 @ 28%) will be payable.
However, if instead, James
transfers a two-thirds interest in the property to Tom prior to sale, the
result is very different. One-third of the gain (£11,000) is treated as
accruing to James. This is covered by his annual exempt amount, so no CGT is
payable.
The remaining two-thirds
of the gain (£22,000) accrues to Tom, of which £11,100 is covered by his annual
exempt amount, leaving £10,900 in charge on which CGT of £1,962 (£10,900 @ 18%)
is payable.
By utilising the no gain,
no loss rule, the couple can save CGT of £4,170.
Practical Tip:
The no gain, no loss rule generally allows married couples or civil partners to change ownership of assets prior to sale to minimise their combined CGT bill.