18 September 2023

Splitting assets with your other half can reduce Capital Gains Tax

At a glance

  • Selling an asset may mean you need to pay Capital Gains Tax.
  • There are several ways you can reduce or avoid this bill, including splitting or giving assets to your spouse or civil partner.
  • Whether you give away assets to your other half or do something entirely different, we can help you manage your finances as tax-efficiently as possible.

Selling a second property? Cashing in a share portfolio? When you sell a valuable asset that’s gone up in value since you bought it, you may have to pay Capital Gains Tax or CGT on your profits.

One possible way of avoiding, or at least reducing this tax bill, is by giving an asset to your spouse or civil partner. Or you could split it with them. By doing this, both of you are able to use your individual CGT allowance and reduce the amount of tax payable overall.

Who pays Capital Gains Tax?

CGT Is a tax on the profit you make when you sell something that has Increased In value. It’s important to remember that it is not a tax on the whole amount, just on the profit you make – sometimes called a ‘chargeable gain’. You may need to pay CGT if you sell certain assets and the overall profit you make is over the annual CGT allowance.

So-called ‘chargeable assets’ include shares that aren’t part of an ISA or pension (both CGT exempt); business assets; personal possessions worth more than £6,000; and property that isn’t your main home. That could include a second home, a buy-to-let rental, or even a house or room that Is stayed In from time to time.

How much Capital Gains Tax will I have to pay?

How much CGT you pay depends on your income and the asset you’re selling.

If you pay the higher or additional rate of income tax and you’re selling residential property, you’ll pay 28% CGT on your gains above the annual CGT allowance. If you’re selling a different type of asset, such as investments or high value items, you’ll pay 20% CGT (this doesn’t apply to the main family residence).

If you pay basic-rate tax, then CGT is charged at 18% for residential property and 10% if you’re disposing of other assets. However, if your gains tip you into the higher-rate tax threshold, you may pay tax at both rates.

Certain business assets may also be eligible for a special rate of 10%. This is known as Business Asset Disposal Relief.

It’s important to remember that the tax is only charged on the gain that you’ve made on the asset, not its total value.

What is the Capital Gains Tax allowance?

The CGT allowance for 2023/24 is £6,000 per individual and in 2024/2025, it will drop down to £3,000. As far as CGT is concerned, if you are living with a spouse or a civil partner, you each currently have a £6,000 tax-free annual allowance. £6,000 is the maximum profit you can make on the sale of chargeable assets this tax year before you have to pay CGT.

You get a new CGT allowance each year. However, if you don’t use it in one year, it cannot be carried over to the following year.

Can giving assets to my spouse or civil partner cut our CGT bill?

If the sale of an asset is going to take you over your £6,000 CGT allowance and land you with a tax bill, you can give the asset to your spouse or civil partner – so long as they haven’t already used up their allowance. They can then sell it and use their own £6,000 annual allowance. This means you can reduce or avoid paying CGT altogether.

For example, if you have shares that are now worth £17,000 more than when you bought them, selling them would take you over your CGT allowance. Instead, you could give some shares to your spouse or civil partner who could then sell them. This means the amount gained is less than your individual allowances and won’t be subject to tax. If you split the asset equally, each of you would have a gain of £8,500, of which £6,000 would be tax-free. So each of you would only pay CGT on £2,500. That is assuming that you have no other losses from sales of other assets that you could offset.

This only applies to individuals who are married, in a civil partnership and living together. If you are living together, even in a long-term relationship, but not married or in a civil partnership and you give an asset to your partner, there may be CGT to pay.

It’s important to note, though, that you have to give away the asset outright and your spouse or civil partner will become its legal owner. If you’re planning your financial future together, this shouldn’t be a problem –but it is something to be aware of. The rules are different, and quite complicated, if for any reason the relationship breaks down and you become legally separated or divorced.

Are there other ways to cut my CGT bill?

You do have several other options:

•    You don’t have to sell an asset off all at once. Stagger the sale of assets over several tax years and you can make the most of several years’ CGT allowance. You could sell part of a share portfolio on 3 April and the rest on 6 April to take advantage of two years’ CGT allowance.
•    You can offset any losses you’ve made on other assets. So, if you have a share portfolio or family heirloom that sold at a loss, for example, you can use that to reduce the taxable gain on another asset you’re selling, such as property.
•    Over time, you can shelter more of your assets from tax by investing them in an ISA or pension. You might want to consider a Bed and ISA – this is where you sell shares (the Bed part) and buy them back within an ISA wrapper to shelter future gains.

How we can help

CGT is a complicated area of tax-planning and can trip many of us up. It can make selling assets seem fraught with hassle. But depending on your circumstances and over the long term, it could still work out to be more tax efficient than drawing down other assets, such as your pension.

By talking to us and considering all your assets together – rather than in isolation – you’ll be able to build a solid, holistic financial plan for your future We’ll be able to help you work out which assets you need to sell and when, or which you might want to give away.

Whether you give away assets to your other half or do something entirely different, we can ensure your finances are managed as tax-efficiently as possible. This means taking advantage of all available reliefs and allowances so you pay the right amount of tax and no more than you need to.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

SJP Approved 05/09/2023

By Matthew Forbes