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.
Date: 25th February, 2008
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