Tax planning could bring financial rewards
QUESTION: I own a property which I have rented out for many years. It's become a burden as there are endless maintenance issues to deal with and it's becoming increasingly difficult to find reliable tenants. Ideally, I'd like to sell it as soon as possible. It was bought at the peak of the property boom so I will certainly make a loss on the sale. My husband also has a couple of apartments which he bought a few years ago in an area which has recently seen quite a significant rise in property prices. He wants to hold on to the properties for another few years, but he would sell one of the apartments now if it was possible to offset the loss on the sale of my property against the profit on his sale. If we can do this should we sell both properties in the same tax year?
ANSWER: The members of a married couple or civil partnership are taxed separately. Their income is taxed separately and each spouse or partner is entitled to their own personal allowance. Capital gains are also taxed separately, each spouse or partner being entitled to the annual exempt amount, which is currently £11,700. This means that the first £11,700 of capital gains chargeable on an individual each tax year is free from tax. Unfortunately, losses of one spouse or civil partner may not be set against gains of the other. So your husband's capital gain cannot be reduced by offsetting it against your capital loss.
It may be possible, however, to carry out some tax planning before the sale of the properties, which may benefit your combined overall tax position, as long as you are both living together. Transfers of assets between spouses or civil partners who are living together benefit from the ability to transfer assets to one another free from capital gains tax. The acquiring spouse or civil partner takes over the other's acquisition cost. This has no relevance to assets acquired by a surviving spouse or partner on the death of a partner or spouse, as these death gifts are transferred at probate value. The rules relating to spousal lifetime transfers enable couples to plan in advance and make appropriate transfers one to the other before negotiating a disposal to a third party, so that, for example, one does not have gains in excess of the annual exempt amount when the other has unrelieved losses. Such transfers must, however, be outright gifts.
Stamp duty and stamp duty land tax is not normally charged on the value of assets transferred between spouses or civil partners, however, if the property transferred is mortgaged property and the spouse or partner to whom the property is transferred takes over responsibility for the mortgage the mortgage debt is liable to stamp duty. This charge can be avoided if the spouse or partner who is transferring the property continues to take responsibility for the mortgage payments.
So, while you cannot benefit from the ability to transfer capital losses to your husband to reduce his capital gains tax exposure, with careful planning it may be possible to reduce your combined tax exposure by making carefully timed spousal asset transfers before a sale to a third party so that the same spouse is disposing of both assets. This means that the capital gain on one disposal can be reduced by the capital loss on the second property disposal.
:: Janette Burns (firstname.lastname@example.org) is associate director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.