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A husband and wife client have both worked for a publicly quoted plc for many years. They have both acquired shares over a number of years via save-as-you-earn schemes and are keen to make use of the 10 per cent capital gains tax rate as soon as possible. Readers' views are sought on the effect of each spouse transferring his/her entire holding to the other with immediate effect.
A husband and wife client have both worked for a publicly quoted plc for many years. They have both acquired shares over a number of years via save-as-you-earn schemes and are keen to make use of the 10 per cent capital gains tax rate as soon as possible. Readers' views are sought on the effect of each spouse transferring his/her entire holding to the other with immediate effect.
Am I correct in thinking that, as the acquisition date after the transfers for each spouse's holding is post 5 April 2000, apportionment of any gain into a business asset and non-business asset proportion will not apply? Does this also mean that shares acquired before 6 April 2000 by each spouse will qualify for 10 per cent capital gains tax when disposed of after 6 April 2002 by the other spouse? Finally, if this is the case, how are shares acquired after 6 April 2000 to be identified in each spouse's new holding when it comes to calculating taper relief due? So much for simplification!
(Query T15,945) - BOA.
Before addressing the technical aspects of 'BOA's' question, it is perhaps appropriate to consider the last four words of the query. The issue of inter-spouse share transfers took up six pages of Taxation, 18 October 2001 with Keith Gordon looking at the definition of business assets in such cases and Mike Thexton considering entitlement to taper relief and the share identification rules. These articles are not alone - for example, the Revenue's own Tax Bulletin devoted two articles to the subject (April and August 2001). If there is any certainty on the subject, it is that the topic is fraught with confusion with no-one knowing quite how the law should be interpreted.
The above-mentioned articles do not even consider the issue at the heart of 'BOA's' query - that being the ridiculous position that pre-April 2000 shareholdings in these circumstances will not qualify for the highest rate of taper relief until April 2010, whereas shares acquired later will qualify within two years of their acquisition date. If the Government wishes to demonstrate that it has any ability to listen (and admit that it may have got things wrong in the past), a simple amendment in this year's Finance Bill will be a welcome sign. Amendments to the bigger issue of inter-spouse transfers will also be welcome, but I, for one, would prefer to wait a further year if the delay means that the resulting legislation is free of any further problems.
Turning now to 'BOA's' specific query, it appears that he is proposing that husband and wife exchange their respective shareholdings. At face value this would fail to achieve the desired result because of section 105(1), Taxation of Chargeable Gains Act 1992. That provision will identify the shares that the husband gives to his wife to the equivalent number that the wife transfers back to him and vice versa. To the extent that the husband and wife's shareholdings are identical (in quantity), the transaction is circular.
Not surprisingly, the legislation does not explicitly deal with such circumstances. However, the approach of the courts (should any dispute arise) is likely to be to ignore the transaction.
An alternative interpretation is to consider each spouse in turn. The husband's shareholding (say) is transferred to his wife. To the extent that their shareholdings are identical, an equivalent number will come back on the same day (section 105(1)). The wife is required to identify the incoming shares with the outgoing shares so there is no net change to her shareholding. As her outgoing shares are transferred to her husband, they leave at no gain and no loss; in other words, he acquires his old shares at their original base cost but with a later acquisition date. The problem with this approach is that one needs to read between the lines to maintain the symmetry between the spouses. But even that will not help 'BOA's' clients to accelerate the application of the 10 per cent rate. That is because paragraph 15(2) of Schedule A1 provides that assets acquired from a spouse are treated as acquired on the day that the transferor spouse acquired them. Paragraph 15(3) makes it clear that such an approach is applied iteratively in respect of assets that were previously owned by the transferee spouse. As a result, any pre-2000 shares will not lose their pre-2000 identity.
Depending on the gains inherent in the shares and the availability of the couple's annual exemptions, there may be some scope for the careful use of life interest trusts to restart the taper clock or even some outright disposals (perhaps to children) - the latter meaning that the assets will cease to qualify for the enhanced rate of taper relief. However, it is assumed that the inherent gains are too great for this to be attractive.
An alternative strategy would be for the husband and wife to use the last-in first-out rule to their advantage. It has been shown that (short of making an outright disposal) it is not possible to change the status of pre-2000 shares for the purposes of taper relief. For these, one will have to wait until 2010 (or at least until a change in the rules).
For later acquisitions, the top rate of taper relief will be attained within two years of the acquisition date. However, disposing of such shares will need careful management so that even later acquisitions are not deemed to be disposed of in the same transaction. To protect against this, when one spouse (A) wishes to dispose of some shares at the highest rate of taper, he/she should gift any shares acquired within the previous two years to his/her spouse (B). B will simply be holding them to allow the shares subject to the substantial disposal to be identified as the shares qualifying for the maximum taper rate. After 30 days, it will be safe for B to transfer these shares back to A together with any shares that B similarly needs to shield from a premature disposal. B will then be able to dispose of his/her 'older' post-2000 shares safely.
This solution is not satisfactory and one should be careful to ensure that the inter-spouse transfers are not treated as settlements. And in any event, it may be the case that the post-2000 shares are not standing at so great a gain to justify the palaver of the inter-spouse share-swapping. In the meantime, we should just hope for reform of the rules. - Kalonymous.
The Revenue's Interpretation RI233 details the matching rules for inter-spouse transfers, with the no gain/no loss rules as per section 58(1), Taxation of Chargeable Gains Act 1992 applying. It is also stated that section 58(1) does not change the date of disposal or acquisition, meaning for the transferee spouse that the shares transferred are treated as a single acquisition, with subsequent disposals being matched under ibid., section 106(A) rules.
When calculating the taper relief available as the result of the transferor spouse, paragraph 15 of Schedule A1 (the taper relief rules) states that, where there is a transfer, the transferee spouse is treated as acquiring the asset at the same time as the other spouse originally acquired it. This leads to a conflict (or, as the Revenue calls it, 'tension') between the basic identification rule, which treats the shares as acquired on the date of transfer, and the taper relief rule, which treats the shares as acquired on the same date as the first spouse.
Paragraph 17906 of the Revenue's Capital Gains Manual (Taper relief: qualifying holding period: assets transferred between spouses - October 2001) states:
'Paragraph 15 of Schedule A1 to the Taxation of Chargeable Gains Act 1992 provides special rules for assets transferred between spouses where section 58 applies.
'Under section 58, an asset transferred between spouses passes without triggering a gain, or loss, at the time of the transaction. The gain or loss on any later disposal takes account of the change in the asset's value while owned by both spouses. The qualifying holding period for taper relief will be the total period of ownership of both spouses falling after 5 April 1998 …
'Where the disposal within section 58(1) is shares, the share identification rules will still apply to treat any transfer as an acquisition by the transferee spouse even though paragraph 15 of Schedule A1 calculates taper relief based on the combined period of ownership by the transferor and transferee spouses.'
Therefore as explained in Mike Thexton's 'Share Identification' article (Taxation, 12 April 2001 at page 42):
'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.'
Turning to Keith Gordon's article 'More Tinkering With Taper' (Taxation, 16 August 2001 at page 494 et seq), we read:
'The rules defining when shares constitute business assets are considered in paragraph 4 of Schedule A1.
'Essentially the status of the shares depends on whether the company is a qualifying company in respect of the person(s) making the disposal. … The Finance Act 1998 rules were narrowly drafted and generally required a trading company and a five per cent shareholding for an employee to qualify for business asset taper relief, and a 25 per cent shareholding for anyone else.
'Finance Act 2000 expanded the definition of trading company to allow all employees of trading companies to qualify for the enhanced taper relief given to business assets … However, since the new definitions only apply from 6 April 2000, taxpayers who acquired shares shortly before that date may be in a worse tax position (and suffer more complex calculations) than someone who acquired the shares after that date. However, these anomalies can be overcome if disposals are triggered now (perhaps by gifting the shares into a trust).'
So, regarding the proposed inter-spouse transfer, for taper relief purposes, the non-business asset status of the pre 6 April 2000 shares for the period 6 April 1998 to 5 April 2000 remains in force, even though for each spouse the new acquisition date would be afterwards. This means if the proposal were implemented, as suggested by 'BOA', then the hoped for 10 per cent capital gains tax rate for the post 6 April 2002 disposals of the pre 6 April 2000 shares would not apply, but it would apply to the shares acquired after 5 April 2000. So perhaps in order to obtain the required result, in each case, thought should be given to gifting the shares, as suggested above, into separate trusts.
Please note that as the employee qualification status of each spouse is the same, then this factor would remain unchanged when considering their own status, following the proposed inter-spouse transfers. - NK.
