CGT value of half share - dispute with DV

CGT value of half share - dispute with DV

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Mr X owned a commercial property from 1970s and transferred half to wife in 2004 then a little while later the whole was gifted to son. DV is saying that the 31 March 1982 value should be discounted by 10% to reflect joint ownership even though it was not then jointly owned. Is he correct?

Also he is saying that each half share transfer to the son should not be discounted. He cites the following extract from the VOA manual:

"7.27 Connected party transfer of all shares
Where it is necessary to provide a market value in a connected party transfer involving the disposal of all undivided share interests by means of a single conveyance the circumstances of the sale have to be taken into account. An example would be when a husband and wife jointly own a property which they gift to one or more children. In considering the disposal for either the husband or the wife the asset to be valued is the half share interest. However, the valuation must reflect the reality of the situation that the other shares are, in the real world, actually on the market for sale at one and the same time and the co-owners are all acting in concert. In such circumstances it is unlikely that the vendors would accept any discount from their arithmetic share of the entirety value and similarly the purchaser would not expect to receive any discount. (This situation can be distinguished from that in a hypothetical sale of one share at say 31 March 1982 when the other share is not in reality on the market at that date)."

The above appears to contradict the Inland Revenue capital gains tax manual which states by way of an example at 74250:

"NON-ARM'S LENGTH DISPOSAL IN 1991
The disposal is to a connected person so the market value of the land is substituted for any consideration actually paid, TCGA 1992, S 18 and TCGA 1992, S 17. A and B have each disposed of their own asset, an undivided 50% share in the land. Note that the assets to be valued are those which A and B have disposed of, not the asset C acquires."

Surely this means that the value should be discounted as an undivided share and therefore discounted? Or am I missing something??

John R

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By User deleted
21st Jun 2006 11:45

The question is presumably in relation to CGT only
For IHT the statute is quite specific, denying any discount where husband and wife are joint owners[IHTA s.161].
This does not apply for CGT [other than where a half share does not devolve on a surviving spouse and so is chargeable to IHT].

This is equivalent to what the DV is calling the 'real world' position for the gift for CGT purposes but there is no statutory provision equivalent to IHTS s.161.

Is the DV's manual justified in denying a discount at the date of the transfers of husband and wife's sparate interests to son?

There is no contradiction between the two manuals. The CGT manual says that 'market value' is to be used,and the DV says that in computing 'market value' no discount is appropriate.

Is he right?

How do you compute the market value?

Would it be the same if Father gifted his share to son on day one, and some time later mother gifts her share. Would the answer be the same if that were one week, one month or one year?

When valuing assets the likelihood that the assets are going to be sold can indeed be a factor to take into account in looking at a discount for a non 100% stake.

But that is not the same as saying that simultaneous gifts have the same quality. A mere assertion as to 'the reality of the situation' is not the law-indeed if it were then IHTA s.161 would be redundant.

If father had been asked would he sell his half share at the moment he made the gift, he might well have said he would be prepared to take a discount on his half share.

That is not the same situation as a gift to his son.

He and his wife were happy to gift their shares simulataneously, allowing their son to enjoy the marriage value.

To test this hypothesis, suppose that father and mother each owned 40% of the shares in X Ltd, which they gave simultamneously to their son. For IHT s161 would aggregate their holdings, but for CGT each has a 40% holding, and the value of their individual holdings would not be valued as half of an 80% holding but at a much lower figure.

Indeed the result if the shares do not qualify for BPR can be both an IHT and a future CGT charge for the son, with the value for IHT being ignored when he disposes of his shares and the lower CGT acquisition cost applying.

Don't accept the assertion from the DV

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