CGT planning: Banking indexation on interspouse transfers – Take 3

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Draft legislation recently issued for CGT simplification has partly failed to do what it says on the packet, as far as interspouse transfers go. This problem however, is being corrected and spouses should be considering transferring assets between them by 5 April 2008 to preserve indexation.**

Since the chancellor announced an end to the indexation allowance for individuals with capital gains in his pre-budget report back in October, many great minds in tax have been trying to resolve a hiccough in the legislation which may or may not restrict the banking of indexation on interspouse transfers of assets first acquired pre.31.3.1982 made before the new rules come into play.

General consensus within HMRC too seems to be that a spider's web is easier to untangle than the interrelation of...

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28th Mar 2008 17:26

Panic Over
I've found the reference now and can explain. The paragraph is concerned with the identification rules for shares and in particular the indexed pool of shares acquired between 1982 and 1998. Before 1993 the indexation allowance could create a loss but this was ruled out for disposals from 1993 onwards. However where an asset had been transferred between spouses or companies between 1982 and 1993 (November - exact date eludes me) the IA already given on that transfer became 'protected IA' and could still create a loss. To ensure that it could an adjustment could be made to historic cost of this pool of shares. From 1993 onwards, as it states, no adjustment would have been made to historic cost but... The s104 holding at 5 April 2008 that it refers to is comprised of shares SOLELY originally acquired between 1982 and 1998 and the only additions made to this pool would be such things as bonus issues and rights issues. Since 1998 on a transfer between spouses the spouse acquiring the shares acquires under the separate identification rules of s105 - LIFO for each acquisition and no pooling , and so is NOT affected by this paragraph. PHEW!

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By Anonymous
28th Mar 2008 16:23

Page 53

it's on page 53 of 1148 in the pdf version

it is paragraph 100 under RESOLUTION 7 CLAUSE 6 SCHEDULE 2

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28th Mar 2008 11:45

Note 100? There isn't a note 100 to the explanatory notes I'm reading - page 41 of the notes, para 59 of schedule 2 - and it does take spouses out but leaves companies in - as the FAQs promised.

More detail please

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By Anonymous
28th Mar 2008 11:25

For what it's worth...
For what it's worth (not much, I know), the HMRC FAQs on the CGT changes still say that indexation will not be stripped out.

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28th Mar 2008 09:41

See explanatory note 100 to the Finance Bill 2008
This states that spouse transfers pre 6 April 2008 will not 'bank' indexation allowance re shares.

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By Anonymous
11th Feb 2008 16:30

Devil's in the detail of the guidance?
I note that the HMRC guidance says that indexation will not be stripped out and that various people have commented on the 31st March 1982 'problem'.

I have to say that my reading of HMRC's guidance (notwithstanding that they have apparently said through channels that they want to deal with it) is that it is not inconsistent with there being no carry-over of indexation on a 31st March 1982 asset.

The second sentence of FAQ1 - 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 - includes the words 'where applicable'.

At present there is no indexation in the base cost of an asset held by a transferee spouse who's transferor spouse held the asset on 31st March 1982 (as the legislation works by treating the transferee as having held the asset on 31st March 1982). There is therefore no indexation to 'strip out' on a post 5th April 2008 disposal.

I'd be interested in other people's thoughts on this to assist. (and I'd certainly appreciate in this case being told I'm just wrong!)

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12th Feb 2008 12:34

Schedule 3
To follow what they've done (and they obviously don't realise they have done it themselves) it is important to remember that when an asset is transferred to a spouse and then sold there are TWO transactions.

Number one is the spouse transfer - it must be genuine and MUST NOT be attempted on the same day the asset is finally sold by the way - this is COST plus INDEXATION for the transferor spouse and COST plus INDEXATION for the transferee spouse.

Number two is the sale following the spouse transfer and it is onle here that the special provision strips out the indexing on cost for a pre-31.3.82 asset to allow indexing on 31.3.82 value to be substituted. Now this is what we are worried about but... the draft legislation removes the references to spouse transfers from Schedule 3 so that where the disposal takes place after 5 April the legislation no longer requires the stripping out of the IA for individuals, only for companies where indexation allowances and 31.3.82 values are still relevant.

In my humble opinion there are still two other issues - what if the transferor spouse had made, or could still make (?) the 31.3.82 election - the transfer price should then be 31.3.82 VALUE plus INDEXATION ON 31.3.82 VALUE - is it? Secondly, if the election had not been made and original cost was much less than the 31.3.82 value then cost plus indexation could still be less than 31.3.82 value and the spouse transfer could backfire.

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