Assets transfer between spouses – No gain/no loss rule
Whilst spouses and civil partners are taxed independently, some tax breaks are available. One of these is the ability to transfer assets between them at a value that for capital gains tax gives rise to neither a gain nor a loss, also known as the no gain/no loss rule. This can be very useful from a tax planning perspective.
No gain/no loss rule
The no gain/no loss rule means that where an asset is transferred from one spouse to another, the value of that asset is equal to the transferor’s base cost. This is the case regardless of whether there is any actual consideration and the amount of that consideration. Unlike other transfers between connected persons, the market value rule does not apply.
The effect of the no gain/no loss rule is that any gain that has accrued while the transferor has owned the asset is passed to the transferee and is not chargeable to the transferor. The gain does not materialise until the asset is disposed of outside the marriage or civil partnership.
Example of No gain/no loss
John purchased a painting in 2013 for £6,500. In 2018, he transferred the painting to his wife Christine. At that time, the painting was worth £9,000. Christine sells the painting at auction in August 2022 for £12,000.
When John transfers the painting to Christine in 2018, it is deemed to be transferred at a value of £6,500. This is John’s base cost and the value that gives rise to neither a gain nor a loss. Christine assumes John’s base cost of £6,500. There is no capital gains tax to pay on the increase in value of £2,500 during John’s period of ownership.
When Christine sells the painting in 2022, the full gain of £5,500 is chargeable (£12,000 – £5,000). Christine is liable for the full gain, not just the increase in value since she acquired the painting.
Christine realises no other gains in the tax year, and the gain is sheltered by her annual exempt amount. If the painting had fallen in value to below £6,500, Christine would have the benefit of the loss.
Tax planning opportunities
This rule opens up several tax planning opportunities for spouses (or civil partners).
Access unused annual exempt amounts
Transferring an asset/share before disposal can access a spouse’s unused annual exempt amount. The annual exempt amount for 2022/23 is £12,300. Using this strategy can save the couple up to £2,460 in tax (£12,300 at 20%), or £3,444 for residential property gains (£12,300 at 28%).
Make use of a lower tax band
Where a gain cannot be fully sheltered by available annual exempt amounts (if the spouses have different rates of tax) the no gain/no loss rule can be used to share the chargeable gain so that it is taxed at the lowest rate of tax. For example, it may be possible to reduce the tax paid on some or all of the gain from 20% to 10%, or for residential property gains, from 28% to 18%.
Change income allocation
Income from an asset owned jointly by spouses is taxed 50:50 regardless of the actual ownership shares unless a Form 17 election is made. However, to ensure that income is taxed at the lowest possible marginal rates, the no gain/no loss rules can be used to change the underlying ownership to the desired shares. A Form 17 election can then be made so the individuals are taxed on the income by reference to those shares.
Access business asset disposal relief
Business asset disposal relief reduces the rate of capital gains tax to 10% on qualifying gains up to the £1 million lifetime limit. Each spouse has their limit. To access partner’s limit, assets or shares can be transferred from one spouse to the other prior to the disposal of the business or its shares. However, remember the conditions must be met for two years before the disposal which means you will have to plan ahead it is necessary to plan ahead.
Find out more about the no gain/no loss rule on the official government website.