Inter-spouse transfers and the banking of indexation
My fellow partner and renowned tax lecturer Robert Jamieson has provided me with the following note about “banking” indexation allowance ahead of the new capital gains tax rules which come into force on 6 April 2008.
Shortly after the Chancellor’s announcement that he was abolishing the indexation allowance for individuals with effect from 6 April 2008, tax advisers realised that clients who had accrued substantial indexation up to April 1998 could, in many cases, ‘bank’ the relief by making a simple inter-spouse transfer of the relevant asset before 6 April 2008. Following the no gain no loss transfer under S58 TCGA 1992, the recipient spouse would hold an asset at a revised base cost which was no longer deemed to include an indexation component.
It was then spotted that there was a problem if the asset fell into the rebasing regime on account of the wording in Para 1 Sch 3 TCGA 1992. This states that the recipient spouse will pick up the transferor’s rebased cost and accrued indexation so that the latter would still be lost on a disposal after 5 April 2008. It now appears that HMRC are of the opinion that the draft CGT legislation published on 24 January 2008 deals with this difficulty. If that is the case, it is still not clear which provision addresses the matter.
Reference can be made to the first of HMRC’s FAQs on the CGT reform proposals which reads as follows:
Q. If I make a no gain no loss transfer on or before 5 April 2008, for instance a transfer to my husband/wife, will he/she retain the benefit of any indexation allowance due on the transfer?
A. Indexation allowance will not be stripped out when the person who acquires the asset under a no gain no loss transfer disposes of it after 5 April 2008. For example, in the case of an inter-spousal transfer, indexation allowance will continue to be included, where applicable, in arriving at the allowable cost to the transferee spouse.’This would seem to bear out HMRC’s professed intention, although astute observers will note that there is no express reference in the FAQ to a 31 March 1982 holding date for the transferor spouse. Interestingly, in the trusts discussion forum, Matthew Hutton has recently mentioned that he saw ‘non-confidential minutes’ of a meeting in November 2007 where HMRC put on record their view that the March 1982 holding period represented ‘an unfairness to the taxpayer which would be corrected by legislation’.
None of the above is very satisfactory for those who want to give definitive advice to their clients (unless they are content to rely on HMRC assurances). However, at the end of the day, what does a taxpayer lose by making an inter-spouse transfer of an asset such as land or shares which predates 31 March 1982?
Robert Jamieson MA FCA CTA (Fellow)
As Robert says there is nothing to lose by making such a transfer but it might be wise to make preparations but wait until the Budget on 12 March to see if the point is clarified.
I have read somewhere that the taper relief . like the indexation allowance might also be preserved by an interspouse transfer before 5/4/08., with the recipient taking as a new base value the price at the time of transfer. Obviously the tax on a stock held on and sold post 5/4/08 at 18% might in certain cases exceed the higher rates pre that date where there would be substantial taper relief on a large gain. Is this correct ? Ougfht I to make the appropriate calculations and carry out the interspouse transfers?
Malim
The new rules for capital gains tax do not provide for taper relief to be available after 5 April 2008 in any circumstances. You may be thinking of gifts to non spouses/civil partners - these would involve being taxed as though the assets were sold at market value and would crystalise indexation and taper relief if made before 6 April. The recipient's base cost for the future would be the market value - but remember there may be tax to pay and no proceeds to pay it out of.
As you point out there will be situations where the tax at 18% is more than the tax due on a gain after taper relief before 6 April 2008. In general this will only be where there is an element of Business Asset Taper Relief available or the base cost is high in relation to the expected proceed and the asset has been held for a long time thus securing significant indexation.
Regards
Lisa
Can one make a no gain / no loss transfer of rented property to a spouse and so bank indexation before 5 April 2008 and then the transferee spouse make a no gain loss transfer of the whole or part of the transferred property back to the original transferring spouse after 5 April 2008, with the banked indexation remaining included as part of the cost and also therefore getting the individual CGT exempt amount for both spouses in the event of a sale after 5 April 2008 and also having the rental income divided between tem so reducing potentially higher rate tax payable. Are there anti avoidance measures in place to prevent this?
Philip
As Robert Jamieson mentions in his note, HMRC have confirmed on its website that inter-spouse transfers do "bank" the indexation allowance but there is some doubt whether the revised legislation, as drafted, gives this result in every case. No doubt this point will be rectified before the Finance Bill receives Royal Assent in the summer.
Whether a subsequent transfer in the reverse direction would jeopardise this transaction is not clear. There is no specific legislation so far but this could be introduced in the Finance Bill. HMRC could possibly consider these transactions to be pre-ordained and effectively cancel them especially if the reverse transfer was in respect of exactly the same asset rather than just a part. The proximity of the subsequent transfer might also have a bearing on whether the transfer is challenged.
Remember that under Self assessment it may be necessary to highlight the possibility that the transfer could be challenged in order to make adequate disclosure.
Thanks
Lisa
If the asset (shares) was owned by a grandparent pre 1982, transferred post 1982 to daughter with held over gain, then transferred in March 2008 to daughter's husband to bank indexation allowance up to 1998, what happens to held over gain?
Any guidance welcome
Thanks
Jim
Jim
When someone receives an asset which is subject to a hold-over claim they are deemed to have acquired it at the market value at the time of transfer. However for capital gains tax purposes the "base cost" is calculated as being the market value less the gain held over - so effectively the base cost of the recipient is the original cost of the donor.
If he gift was made after 5 April 1985 the calculation gain to be held over would generally use either the cost or the value of the asset at 31 March whichever was higher. And going forward this held over gain will still be taken into account in arriving at the base cost of the asset, for example, on an inter-spouse transfer.
There is a quirk where the gift was made between 6 April 1982 and 5 April 1985 where it was not possible to use the 31 March 1982 value in lieu of cost. An arbitrary relief was introduced and is given by deducting only 50% of the gain from the market value at the time of the gift. This "halving" relief will be abolished from 6 April 2008 so an inter-spouse transfer will not only crystalise indexation but will also ensure that the halving relief is consolidated in the revised base cost going forward. You need to check the figures with your accountant
thanks
Lisa
I purchased a commercial property in 1987 which I had previously been leasing and using as my main business premises since 1981. I used this property for my business until 1989 when I then leased the property out to another company. In 1992 I re-occupied the premises and ran my company from there until I retired in May 2005. I sold my company and the buyers are still operating from these premises now and paying me rent.
Could I claim the premises as a business gain under the new entrepreneurs relief if I still own the premises after 5 April 2008, or should I be transferring all or part ownership to my spouse before then?
John
It would appear that the property would qualify as a business asset for taper relief purposes from April 1998 to May 2005 when you sold your company. Whether it so qualified after that date would depend on whether the company now using the property is an "unlisted trading company" as defined in the legislation. If it is, then a sale now should attract maximum business taper relief giving an effective tax rate of 10% (for a higher rate taxpayer). If the property is not a business asset after May 2005 the effective rate, for a sale now, will be nearer 14%
It is unlikely that the property would qualify under the entrepreneurs' relief (based on draft legislation) as you are not involved with business that is using the property. Therefore a disposal after 5 April 2008 will attract a tax rate of 18% on a larger gain as indexation relief will be lost
A transfer to your spouse before 6 April 2008 should "bank" some indexation but would not give the benefit of taper relief.
Thanks
Lisa