Inter Spouse Disposals

KEITH GORDON MA, ACA, ATII discusses taper relief and inter-spouse transfers

Since the introduction of capital gains tax in the 1960s, transfers of assets between spouses have generally been tax neutral transactions. In the days before taper relief, the spouse receiving the asset was able to acquire the asset at a deemed cost equal to the transferor spouse's indexed cost.

When taper relief was introduced in Finance Act 1998, it was necessary to consider in which circumstances one should treat an asset formerly held by a spouse as a business asset. One option that Parliament could have taken was to consider the use to which the asset was put during the relevant periods of ownership. It appears that this suggestion was at some stage considered during the embryonic stages of Finance Act 1998 since the explanatory notes to the Finance Bill stated that this would be the effect of the (then proposed) legislation.

Perhaps when the clauses were debated that year, Members of Parliament were under the impression that this was the effect of the legislation. As the issue was not raised in debate, one can reasonably assume that Members of Parliament did not object to this principle.

Unfortunately, the legislation as put forward, and subsequently enacted as paragraph 15 of Schedule 20 to the Finance Act 1998, does not follow this principle. Furthermore, the legislation introduces two separate rules: one for shares and one for other assets. No reason is given for these two significant discrepancies from the explanatory notes.

When paragraph 15 applies

Under the normal rules of Schedule A1, on a disposal of an asset (other than shares) by an individual, it is necessary to consider for how much of the relevant period of ownership the asset was a business asset. Paragraph 5(2) states that an asset is treated as a business asset at any such time if it is used for:

'(a) the purposes of a trade carried on at that time by that individual or by a partnership of which that individual was at that time a member;

(b) the purposes of any trade carried on by a company which at that time was a qualifying company by reference to that individual;

(c) the purposes of any trade carried on by a company which at that time was a member of a trading group the holding company of which was at that time a qualifying company by reference to that individual;

(d) the purposes of any office or employment held by that individual with a person carrying on a trade.'

This is relatively straightforward. If the person selling the asset was previously using it for a qualifying purpose then business asset taper relief will be available.

The complications arise once inter-spouse transfers are introduced.

For periods before the transfer, the question of whether an asset qualifies as a business asset can be considered by looking at the use to which the asset is put by either spouse, as stated by paragraph 15(4):

'Where there is a disposal by the transferee spouse, any question whether the asset was a business asset at a time before that disposal shall be determined as if

Issue: 3829 / Categories: Comment & Analysis