29 Mar 2008

Locking in indexation

Insights, Publications

CGT Indexation Allowance currently inflates the tax-allowable cost of an asset by reference to increases in RPI from the date of acquisition up to April 1998.  This will no longer be available for disposals after 5 April 2008.  However, it is possible to “lock-in” the allowance by the simple expedient of transferring the asset between spouses (or same-sex civil partners).  This effectively converts the indexation allowance into additional base cost.  Indeed some of our clients will already have done this.

The draft legislation indicated that this strategy would not be effective for assets already owned (by the transferring spouse) on 31 March 1982.  However, buried in the Finance Bill published is a provision that reverses this.  This is an important change since it is assets that were held on 31 March 1982 which have the largest element of indexation relief: for such assets indexation more than doubles the allowable cost for tax purposes, so locking in the relief is particularly worthwhile for assets of significant value on that date.

This late change is provoking but there is still time to effect such inter-spouse transfers before 5 April, if you act quickly.

Note that:

(1) As well as assets with a significant value on 31 March 1982, it may be worth transferring assets acquired subsequently which have worthwhile indexation accrued on them up to April 1998;

(2) Other taxation consequences should be considered including, for example, the effect on any future CGT Entrepreneurs’ Relief of re-starting the period of ownership in the transferee spouse’s hands; and

(3) It goes without saying that you should only make the transfer if you are happy to give up ownership of the particular asset and trust the recipient!

 

This article was also published by TaxationWeb.