Understandably, once the wedding festivities have come to a close and the couple are all tired out, the happy couple sit down and look at how their newfound love has an effect on their tax affairs going forward.
First and foremost, the couple become a ‘connected party’ for CGT purposes. Connected party transactions result in market value being used as sale proceeds as opposed to any cash actually received (if any), along with any losses being ring-fenced against gains between the same connected party. As a married couple however, any capital transactions are carried out at no gain/no loss ensuring that no gains or losses arise on interspousal transfers. This is especially helpful when planning for gains to utilise a particular spouse’s annual exempt amount in the most tax efficient way or utilising the lower basic rate bands for CGT at 10/18% rather than the higher 20/28% bands. This is also a useful tool where one spouse has losses to utilise against any potential gains.
To benefit from the no gain/no loss rules, a couple will need to be in a legal partnership as opposed to just living together (they would need to be married or civil partners, and must not be separated and see no future together). Special care should be taken where one spouse is not UK domicile and advice should be sought prior to a transaction in this scenario.
A shared residence
As well as becoming connected parties, newly married couples can now only have one main residence between them eligible for principal private residence relief (PPR). This could negatively impact a couples’ tax position should the couple wish to live separately.
This is especially significant where the couple have lived in separate homes previously but now live together in one of those homes. Before the marriage, the individual could sell their PPR (provided it is being used as their main home) and incur no CGT charge on the sale. The last nine months of ownership is always free of CGT provided the property has been used as the PPR at some point during ownership. Following the marriage however, the couple must choose which property is to become their main residence and if the other property were sold, a gain may arise for the period in which the property was no longer the PPR. If the couple have two homes which they use as their residence, an election should be made to HMRC to determine which property is the PPR.
If sold shortly after the marriage, any gain may be small and not result in much tax, however, should a period of time pass or if property values increase, the CGT due could be significant. Special consideration should be given in these situations and potentially consider selling a property before marriage to save CGT in this instance.
Going somewhat hand in hand with the shared PPR rules, for transfers after 6 April 2020, the receiving spouse takes on the ownership history of the other spouse. This means that whilst the spouse inherits the historic cost of the asset, in the case of a main residence, the spouse also takes on the transferring spouse’s PPR history even if they were not married to the person or living in the property during that historic period.
The majority of the time the spousal CGT rules favour a married couple but there are times when consideration should be given to ensure that any transfers between spouses could be detrimental to the tax position. We urge all couples to consider these rules and where required seek advice as to how best plan for these transfers to ensure that they are being carried out in the most tax efficient way. This can save money and keep the marital bond strong.
Further rules exist around CGT and divorce which we will detail in a future article.
The next step
If you would like advice or further information on how best to plan the transfer of your assets, please get in touch with Joe Stuart on firstname.lastname@example.org, or your usual UHY adviser.