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MIKE THEXTON MA, FCA, ATII illustrates the latest developments on transfers of shareholdings between husband and wife
In an earlier article (Taxation, 12 April 2001 at page 42), I examined some of the peculiar results that can arise from the application of the identification rules to husband-and-wife disposals. This article included the following example:
MIKE THEXTON MA, FCA, ATII illustrates the latest developments on transfers of shareholdings between husband and wife
In an earlier article (Taxation, 12 April 2001 at page 42), I examined some of the peculiar results that can arise from the application of the identification rules to husband-and-wife disposals. This article included the following example:
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Example 1 |
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Peter has 1,000 shares in XYZ plc (not his employer): 500 acquired in 1997 and 500 acquired in 1999. He gives them all to his wife Jane in February 2000; she sells half her holding in July 2000. |
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If Peter had sold 500 of his shares without any transfer to Jane, the sale in July 2000 would be the 1999 acquisition (most recent first), with no indexation and no taper relief. This would also follow if the inter-spouse transfer resulted in a simple transfer of all the share history of Jane. |
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However, Jane has a single acquisition of 1,000 shares in February 2000, and she has disposed of half of them, They have a composite base cost, being the 1997 cost plus indexation to April 1998 and the cost of the addition in 1999 without indexation; half the shares qualify for 5 per cent taper relief in July 2000, because of the 'bonus year'. |
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A 'just and reasonable apportionment' is required to determine the cost and taper involved in the disposal by Jane. It would be reasonable to take half the composite cost, and to give half the resulting gain 5 per cent taper relief (although other apportionments might also be equally reasonable). |
The Inland Revenue has now given its (contrary) view on this situation in Tax Bulletin 54, August 2001. Its view is arguable, but it is clearly more important than mine! Note that its view does not appear to contradict the other examples in my earlier article, which dealt with transfers between husbands and wives happening on different days.
The Tax Bulletin confirms that the identification rules apply as normal for husband-and-wife disposals – it is only the value that is affected by section 58(1), Taxation of Chargeable Gains Act 1992 (which makes this the 'no loss/no gain price'). This means that a transfer of 500 shares to Jane in the example would be the most recent (1999) acquisition. There is no controversy with this part of the Revenue's view.
The problem arises from the Revenue's interpretation of the requirements of paragraph 15 of Schedule A1 to the Taxation of Chargeable Gains Act 1992, which requires that for the purposes of taper relief a spouse is deemed to have acquired such assets on the same day that the other spouse originally acquired them. The second spouse can count both ownership periods for taper. The Revenue makes the following comment:
'There is therefore a tension between:
- the basic identification rule, which treats the shares as acquired at the date of the transfer, and
- the taper rule, which looks back to the date of original acquisition by the first spouse.'
'Tension' is a nice word to use for 'a problem arising from the unclear and ambiguous drafting of the legislation'. It could also be applied to how most practitioners feel when trying to understand most of taper relief, or while holding their fingers firmly crossed after giving clients advice on the matter.
The Revenue helpfully points out that there is no problem where the shares concerned are:
- originally acquired by the first spouse on the same day; or
- all disposed of by the second spouse on the same day.
The problem arises only in the circumstance set out in the example:
- the first spouse acquired the shares on different days; and
- the second spouse disposes of some of them.
The Revenue's resolution of the 'tension' is to 'look through' the second spouse's acquisition to the share history of the first spouse, both for taper purposes and for identification purposes. Example 2 shows how my Example 1 would be rewritten, with some costs thrown in.
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Example 2 |
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Taking the facts as in Example 1, Jane has a single acquisition of 1,000 shares in February 2000 for a 'no loss/no gain' price of £10,200, and she has disposed of half of them. The cost of her disposal, according to the Revenue, is half the total composite cost, £5,100. |
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However, in deciding how much taper relief she gets, she must 'look through' the acquisition from Peter, and consider what taper relief he would have received. As a result, her disposal is identified for taper relief only with his acquisition in 1999. She will not receive any taper relief, even though the gain is computed partly using the lower base cost of the 1997 acquisition. |
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She will still own 500 shares, which will all qualify for the bonus year and period since 6 April 1998 on any future disposal, even though it contains part of the base cost of the 1999 acquisition. |
Example 2 gives a solution, but it is not the only solution, and it is arguably not a particularly reasonable solution. It seems irrational to apportion the cost of both acquisitions in calculating the gain, but to take into account the ownership period of only one of the acquisitions.
The 'tension' is created by section 105, Taxation of Chargeable Gains Act 1992, which requires that all securities of the same class acquired by the same person on the same day are to be treated as acquired by a single transaction. This requires the compounding together of the deemed base costs for the receiving spouse, and requires that the actual acquisition date (the date of the inter-spouse transfer) is used for identification purposes. Until the introduction of taper relief, there was no further complication arising from this compounding.
Example 3 sets out my suggestion in my original article for another possible way of 'justly and reasonably' calculating the taper relief on these figures. It regards the 'compounding' of the base costs as something that carries through to taper relief – the single acquisition has a base cost made up of elements from different times, and it can also have a 'compounded' acquisition date for taper relief.
I think that the Revenue's approach fudges the issue by requiring compounding of the base cost but 'uncompounding' of the acquisition dates. Although this is an attempt to resolve the tension between the two pieces of legislation – it seems to produce a result which is neither one thing nor the other.
Looking at the statute for guidance is not particularly productive. I am often asked by delegates on courses how the rules apply to certain situations and the only honest answer is that they do not – the person who wrote the rules never dreamed that such a situation could arise. You just have to do your best to guess how the principles would apply if the parliamentary draftsman had thought of it.' That is effectively what the Revenue are doing with their approach, and it is at least helpful that they have made their view known. As long as it causes no pain to comply with it, that is the path of least resistance!
Section 42, Taxation of Chargeable Gains Act 1992 deals with part disposals, and contains the standard 'A over A plus B' formula. With straightforward disposals of shares, the formula is not used in quite the normal way – it is applied to the numbers of shares rather than the values. Although it would be expected to produce the same result
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Example 3 |
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Jane has a single composite acquisition of 1,000 shares, with a single composite base cost of £10,200, including £200 of indexation (important for restriction of losses if the shares are sold for less than £10,200). Half the shares have an acquisition date before 17 March 1998, and half have an acquisition date in 1999. This proportion could be used in calculating the taper on any future disposal: |
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Example 4 |
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If the Revenue thinks that the taper which would have been allowed to the original owner should be preserved, it could be argued that Jane's gain should be divided up between the acquisitions so that the taper calculation reflects both the different lengths of ownership and the different base costs. There would be two ways (at least) of doing this. |
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·®the gain is £2,900 (£8,000 – 500/1,000 x £10,200); |
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·®this effectively arises separately on the two acquisitions, and the £2,900 can be divided into (£4,000 – 500/1,000 x £4,200 = £1,900) and (£4,000 – 500/1,000 x £6,000 = £1,000); |
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·® the £1,900 gain should receive taper based on the original acquisition date (i.e. 5 per cent) and the £1,000 gain should receive taper based on the later acquisition (i.e. none). |
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Second method |
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·®he Revenue has 'uncompounded' the acquisition date for calculating the taper relief, and has regarded the gain as arising only on shares acquired in 1999; |
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·®it should therefore 'uncompound' the base cost as well, and treat the gain as arising only on the shares acquired for £6,000 in 1999 (i.e. a gain of £2,000); |
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·®the base cost carried forward (£4,200) would then be consistent with the acquisition date carried forward for taper purposes (i.e. pre-17 March 1998). |
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(for a market sale, surely the value retained per share would be the same as the value received for the sale at that moment), it could be argued that it would not under statutory rules: 'A' would be the bid price received, and 'B' would be the quarter-up price required by section 272(3) of the Act. So it might be argued that the use of numbers of shares is in effect an application of section 42(4), which permits the use of expenditure without apportionment where, 'on the facts', that expenditure is wholly attributable to what is being disposed of.
The Revenue's approach seems to demand that something approaching section 42(4) is used for the taper relief, while the standard part disposal rule is used for the cost. Example 4 considers alternatives which are more internally consistent.
The conclusion is that capital gains tax continues to become overcomplicated, uncertain, and a great consumer of otherwise potentially productive time, because new rules keep getting bolted on to old rules without all the possible consequences being considered. It would be of great benefit if the whole of the Taxation of Chargeable Gains Act was torn up and restarted, preferably with a new rebasing, and a real effort was made to produce something internally consistent. Unfortunately, this is unlikely to happen in the near future.
Mike Thexton is a director of Thexton Training and he can be contacted on 020 8715 4434 or by e-mail: thexton@enterprise.net.
