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Share Identification - Mike Thexton MA, FCA, ATII offers some further thoughts on transfers of shareholdings between husband and wife

11 April 2001
Issue: 3802 / Categories:

The difficulties which arise in dealing with transfers of shareholdings between husband and wife, and the operation of three different capital gains tax rules were highlighted in Keith Gordon's article entitled 'Identification Crisis' in Taxation, 24 August 2000 at pages 536 to 540. The three different capital gains tax rules are reiterated below:

The difficulties which arise in dealing with transfers of shareholdings between husband and wife, and the operation of three different capital gains tax rules were highlighted in Keith Gordon's article entitled 'Identification Crisis' in Taxation, 24 August 2000 at pages 536 to 540. The three different capital gains tax rules are reiterated below:

  • The transfer is deemed to take place at a 'no loss, no gain' price, so that the transferee takes over the cost (plus indexation allowance, if applicable) of the transferor.
  • The transferee can count the transferor's period of ownership for taper relief purposes, but has to consider his or her own qualification for the business assets rate.
  • In other respects, the identification rules apply as normal.

That article rightly pointed out that it is wrong to assume that a 'no loss, no gain' transfer means that the transferee simply takes over the acquisition history of the transferor (see Example 1, adapted from the original article).

Example 1

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.

If Peter had sold 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 to Jane.

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'.

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).

Example 1 highlights a number of difficulties for husband and wife transactions. For identification purposes, the date of the inter-spouse transfer is an actual acquisition by the transferee, and this date is therefore important in the share history; but the taper relief depends on a different acquisition date, so the records have to show the original owner's acquisition date as well. In a computer program, it is a question of making sure that there is a field for it, and it is completed by someone who understands what is supposed to go there.

The 'just and reasonable apportionment' suggested above would produce a gain different from that which would have been charged on Peter if he had sold the shares himself. Other peculiar results may also follow: see Example 2.

Example 2

Peter has 1,000 shares in ABC plc. He has owned them since 1990. His wife Jane also has 500 shares in the same company, which she acquired in August 1998. In December 1999, Peter gives 500 of his shares to Jane. In July 2001, Jane is considering selling 500 shares.

The 500 she sells in July 2001 will be her most recent acquisition – December 1999. However, these shares qualify for 10 per cent taper, because of the bonus year and three full years since 6 April 1998. The cost will include indexation allowance up to April 1998.

If she sells the whole 1,000 shares, she will next sell her own purchase from August 1998 – which will not qualify for any taper relief.

In Example 2, the gain charged on Jane would be the same as that which would have been charged on Peter if he had sold the shares himself – it is simply the ordering of Jane's disposals and acquisitions that is tricky.

Some people have suggested the 'bed and spouse' as a way of getting around the 'bed and breakfasting' rules introduced in 1998. Example 3 shows the basic idea.

Some wonder what would happen in Example 3 if Jane later gives the shares back to Peter. If she does so over 30 days after his disposal, the bare rules of the law would treat him as making an acquisition on the date of the gift, and this would not be matched with his disposal over 30 days earlier. However, the Revenue might regard this as somewhat aggressive, and it would want to be sure that all the transactions had genuinely occurred and were freely entered into. If Jane did not know that she had briefly owned the shares, trouble would ensue.

Example 3

Peter has 1,000 shares in LMN plc, which cost £10,000 (with indexation) in 1990 and are worth £17,575 in March 2001. He wants to hold on to the shares, but he also wants to trigger the gain to date, cover it with his 2000-01 annual exemption (and 5 per cent taper relief), and increase the base cost for a future disposal.

If he sells the shares and buys them back within 30 days, the purchase and sale will be identified, and nothing will be achieved. But if he sells them and his wife Jane buys them back, the result is achieved. It is even possible to do this on the same day – it is not necessary to do the deal overnight, but it is necessary to deal through a broker rather than transferring directly to the other spouse.

Lastly, it appears possible to use a husband and wife transfer to manipulate the order of identification. See Example 4.

Example 4

Peter has 1,000 shares in DEF plc: 500 acquired in 1990 and 500 acquired in 1999. Each holding is worth £30,000; the 1980 holding is showing a gain of £7,575, but the 1999 holding is just about breaking even. If he wants to trigger the gain of £7,575 and use his 2000-01 annual exemption, he has to sell the whole holding – if he only sells 500 shares, it is the most recent acquisition, without the gain. He will therefore have to incur extra commission costs to realise the required gain.

If he transfers 500 shares to Jane, and then he sells 500, he realises the gain. Again, a subsequent return transfer by Jane to Peter might be regarded as aggressive.

Alternatively, he could transfer 500 shares to Jane in (say) January 2001 and another 500 to Jane in (say) February 2001. This effectively reverses the identification order in Jane's hands: if she sells 500 in March 2001, they are the 500 she acquired most recently (February 2001), which are the 500 that Peter acquired longest ago (1990 – qualifying for taper relief). She could therefore sell 500 in March and realise the gain, using her own annual exemption, while Peter made another sale from a different shareholding to use his.

Some of these results seem a little peculiar, but they all follow from clear and explicit provisions in the law. If the Revenue objects – it is not our fault!

Mike Thexton is a director of Thexton Training and he can be contacted on 020 8715 4434 or by e-mail: thexton@enterprise.net.

Issue: 3802 / Categories:
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