Capital losses - tax planning for married couples

Loss rules recap

Where you make an overall loss for a year from selling assets such as shares, you're allowed to carry this forward indefinitely to set against later gains. The trouble is there's no flexibility in the rules. They say you must use the losses against the very next gains where these exceed your exempt amount for the year (currently £10,600).

Example. Three years ago Harry made a loss of £25,000 on a property. Each year since he's made gains from selling shares, but these were below the annual exempt amount and so the property loss wasn't used. But recently he sold his stake in a business making a gain of £45,000. After knocking off his 2012/13 exemption this leaves £33,400. He must use the property losses to reduce the amount on which he'll pay Capital Gains Tax (CGT) to £8,400 (£33,400 - £25,000).

Capital Gains Tax rate

You might think Harry would be happy to use the losses to reduce his tax bill, but he's not. His recent gain qualified for entrepreneurs' relief (ER) and so will be taxed at just 10%. Other assets Harry owns, mainly quoted shares, also show gains and he intends to sell them over the next several years; they won't qualify for ER but Harry will pay 28% CGT. He would be better off if he were allowed to use the previous loss against these gains.

Make more gains

One way Harry can make better use of his capital losses is to sell some of his other shares earlier than intended, i.e. before the 2012/13 tax year ends. His past losses can be set against the 28% rate gains first instead of the 10% rate ones.

Tip. You can allocate CGT losses against gains made in the same year in any order you want. So you can pick the 28% gains rather than 10% ones.

Shares buy back

If Harry doesn't want to give up the shares he sold early he can repurchase them. But he must wait 30 days otherwise anti-avoidance rules can cancel the tax advantage. But waiting 30 days might prove costly if the share price goes up in that time.

Tip. As Harry is married he can get around the 30-day rule. His wife can buy the shares on the same day he sells his and after 30 days he can buy them from her. Because of the special rules for husband and wife transfers (see below) the effect for CGT is the same as if Harry had bought back the shares on the same day, but without triggering the anti-avoidance rules.

Shifting gains to make use of losses

Tax efficient use of losses can work even if Harry's wife owned other assets. Where one spouse transfers an asset to the other, by gift or sale, the Taxman treats the deal as if they were sold at a price which resulted in no gain or loss. In effect it's as if the receiving spouse were the original purchaser.

Example. If Harry's wife had owned shares showing gains she could sell or give these to him so in turn he could sell them and trigger gains taxable at 28%. And as explained in the first tip above, Harry can allocate his losses against these gains rather than those chargeable at 10%.

Where you have other assets chargeable at a higher rate, sell these in the same year as the assets liable to the lower rate. The rules allow you to set the losses against the higher rate gains first. Or if your spouse has assets with gains subject to higher rate tax he or she can transfer them to you to achieve a similar result.

Capital losses - tax planning for married couples

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