Chapter 10 Valuation, connected persons and inter-spouse transfers Flashcards
valuation rules, quoted shares and trust units
Valuation rules – there are certain situations in which the market value of an asset may need to be determined for CGT. For example, when there are connected persons involved in the transfer. The open market value of an asset is the price which an asset might reasonably be expected to fetch if sold in the open market.
Quoted shares and unit trusts – to value quoted shares you look at the official list published by the stock exchange at the relevant date, this is published on a daily basis in financial journals. However, the stock exchange official list does not give one price for quoted shares, they give closing bid prices and closing offer prices of all quoted shares and securities. The bid price of a share is the price at which the broker buys from the customer. The offer price of a share is the price at which the broker sells to the customer (the difference in the prices is how the broker makes profit). To value the shares for CGT purposes we take the average of the bid and offer prices.
This method does not apply to unit trusts. We value unit trusts by taking the lower of the bid and offer prices quoted.
connected persons, losses on disposals to connected persons and separating spouses
Connected persons – a taxpayer is connected to their spouse, relatives (parents, grandparents, children, siblings). A taxpayer is also connected to the relatives of their spouse. An individual is connected to a company if they have the power to exercise more than 50% of the voting rights. A partner is connected with his fellow business partners and their relatives.
Transactions with connected persons – all transactions with a connected person take place at market value for CGT purposes. The only exception is with spouses, which is gone at no gain no loss.
Losses on disposals to connected persons – where a disposal to a connected person gives rise to a loss, that loss may only be used against gains on future disposals to the same connected person. The future disposal can be in the same tax year or a later tax year.
Separating spouses – the no gain no loss treatment applies provided the couple are living together and applies until the end of the tax year in which the couple separate. Transfers between individuals who are not living together which occur after the end of the tax year of separation but before divorce takes place with proceeds being deemed to be equal to the market value of the asset.
CGT planning and series of transactions
CGT planning – couples should use both their annual exempt amount each year, therefore they should take advantage of the no gain no loss rules, to reduce the tax bill if needed. The rules can also be utilised to enable brought forward losses to be offset efficiently and the unused basic rate band.
Series of transactions – where a taxpayer makes a series of disposals to one or several connected persons, the anti-avoidance rules in TCGA 1992 must be considered. Where a taxpayer enters into two or more transactions which are linked, you apply special rules. Transactions are linked if they occur within 6 years of one another. Capital gains are calculated by using an appropriate proportion of the aggregated market value. The effect is the taxpayer goes back and recalculates earlier capital gains, with the aim of preventing the artificial reduction of gains by using a series of transactions to one or more connected persons.
