If you are married or in a civil partnership, the ‘bed and spouse’ strategy can help you minimise your Capital Gains Tax bill on assets that you eventually plan to dispose of. Here’s everything you need to know about this useful tax planning strategy.
Capital Gains Tax (CGT)
In the UK, gains that arise when you dispose of assets that have increased in value are liable to CGT. To ‘dispose of’ means to sell, exchange, transfer or give away.
You don’t pay Capital Gains Tax if all of your gains in a year are under your tax-free personal allowance. For the 2020/2021 tax year, the personal allowance is £12,500.
Any gains in excess of this annual allowance will be liable to a CGT of between 10% and 20% depending on your income tax band.
A number of assets, such as your car and your main home are exempt from CGT.
Background of the ‘bed and spouse’ strategy
Until 1998, you could use up some of your CGT allowance by selling an asset you owned to realise a capital gain and then buying the same investment back the next day.
This technique was called the ‘bed and breakfast’ strategy.
People would typically benefit from it by selling an asset on the last day of the tax year and then buying it back the following morning.
Doing so would effectively reset the cost base of the asset. That, in turn, would reduce the rate at which CGT was building up as the asset continued to increase in value.
Nowadays, you must wait at least 30 days before you can buy the same investment again to have the desired effect of crystallising the CGT gain (turning it into profits).
The risk of waiting for 30 days to reacquire assets or investments such as shares after selling is that the market could move against you as you wait.
That’s where the ‘bed and spouse’ strategy comes in.
The ‘bed and spouse’ strategy explained
Under the ‘bed and spouse’ strategy, you can sell an asset or investment to crystallise a capital gain. Your spouse or partner can then buy it back immediately and transfers it back to you. So basically, you crystallise a capital gain while still retaining ownership of the asset or investment.
When the time comes to permanently dispose of the asset or investment, the Capital Gains Tax liability will be lower. That’s because the cost base was adjusted by selling and then immediately buying back the asset or investment.
One thing worth noting, however, is that you cannot directly sell the asset or investment to your spouse. The two transactions have to be separate.
When can you use the ‘bed and spouse’ strategy?
The strategy can be used for CGT planning on investments that typically rise in value over the long term. A good example is stocks or shares.
Through the strategy, you can crystallise the gains on your stocks or shares every tax year. This adjusts the cost base and reduces the rate at which the CGT due is building up.
More useful information
The main purpose of the ‘bed and spouse’ strategy is to retain ownership of an asset while mitigating CGT on ultimate disposal.
If you intend to dispose of an asset immediately while reducing the CGT liable, transferring a part of it to your spouse might be a more helpful strategy. Transfers between spouses are currently exempt from CGT.
By transferring some of your assets to a spouse before selling, you can effectively double your CGT allowance and reduce the total amount of CGT liable after the sale.
It’s worth mentioning that gains from investments within an ISA are also free from CGT.
So if you are, for example, thinking of investing in the stock market, consider doing it within a stocks and shares ISA to keep any potential gains from the taxman.
