Having considered who and what is assessable to capital gains tax, we should now have a look at asset valuation. This is a critical factor in the calculation of gains.
When an asset is disposed of for consideration, the value for CGT purposes would normally be the consideration received. Consideration received is usually the sale price, or insurance proceeds in the case of loss or destruction.
Where an asset is disposed of for consideration to a connected person the market value is used instead of consideration received – sections 17 and 18 Taxation of Chargeable Gains Act 1992 (TCGA).
Connected persons are defined in section 286 TCGA. An individual is connected with his spouse, civil partner, brothers, sisters, parents, grandparents, children, grand-children and spouses/civil partners of any of those as well as the spouse’s/civil partner’s relatives. A trustee in his capacity as trustee is connected with the settlor and any person or company connected with the settlor. A person is connected with his partner and his partner’s spouse/civil partner, except in commercial deals relating to the partnership assets. A company is connected with another company if one has control of the other or both are controlled by the same person.
It should be remembered that although spouses/civil partners are connected under the above provisions, the provisions relating to market value on disposals to connected persons do not apply to disposals between spouses/civil partners living together, which are treated as transfers on a ’no gain/no loss’ basis (section 58 TCGA).
Similarly, where an asset is disposed of by way of gift, whether directly to an individual or to a trust, the market value of the asset will be substituted for the amount of consideration received, if any.
The legislation describes market value as ’the price which those assets might reasonably be expected to fetch on a sale in the open market’.
No allowance is given for any reduction in market value arising out of the whole of the assets being placed on the market at the same time.
For some assets the price or value is readily available. For others it may be necessary to follow a process to arrive at an agreed value. This will often involve a professional valuer, as in the case of land or private company shares.
There are special rules for shares and securities. The market value of shares and securities quoted on the Stock Exchange is the lesser of:
(a) the lower of the two prices quoted in the Stock Exchange Daily Official List, plus a quarter of the difference between those prices
(b) the average of the highest and lowest prices for normal bargains recorded on that day.
Units in unit trusts are valued at the lower of the two prices published by the managers on the relevant date or, if no price is published at that time, at the latest published price before that date.
So how about death? What effect does this have for capital gains tax purposes?
On the death of any person, inheritance tax is chargeable on the estate value immediately before death and the value of an asset forming part of his estate has been ascertained for IHT purposes. That value is taken to be the market value at the date of death for CGT purposes (section 274 and para 9 Sch 11 TCGA).
Where the value of an asset is not so ’ascertained’ – where it is exempt from IHT for example – then the open market value of the asset will be the value at death. This will be the base value for CGT purposes on a subsequent disposal. All the gains accrued up to the date of death are effectively ’wiped out’ – whether or not IHT is chargeable. In the case of quoted shares, HMRC inheritance tax follows the CGT valuation basis described above for shares and securities.
The introduction of the ’transferable nil rate band’ between spouses and civil partners from 9th October 2007 has necessitated a change to the rules regarding the valuation of an asset for CGT purposes. This change to CGT legislation took effect from April 6, 2008 to ensure that the requirement to use the IHT valuation of an asset for CGT purposes will not apply where the value of an asset does not have to be ascertained for IHT purposes on the death of an individual. So, for example, if the IHT value of an asset does not have to be ascertained until the death of a surviving spouse/civil partner in order to establish the nil rate band that may be transferred, then section 274 TCGA will not require the value ascertained on the second death to be used for any CGT calculation and hence any CGT does not have to be recalculated.
There are special rules for unquoted shares. The sale or transfer of unquoted shares has always caused a valuation headache. Since the advent of self assessment the pain is magnified by the need to indicate where estimated values have been used on the tax return form.
When such a tax return is received in the local district the Inspector is required to refer the return through to Shares Valuation Division (SVD), unless the matter can be resolved by reference to a file held locally, or there is little or no tax in question. If SVD considers that values should be challenged, it instructs the local Inspector to issue a notice of enquiry under section 9A Taxes Management Act 1970 (a section 9A notice)The matter is then taken out of the local Inspector’s hands and the taxpayer must negotiate the share valuation with the SVD. It could take some time to negotiate an acceptable value.
When an agreed valuation is finally achieved which is different from the original figure, the taxpayer is invited to make an amendment to his self-assessed tax. If there is more tax to pay in respect of the self-assessment, an interest charge may also be due, as all capital gains tax must be paid in by 31 January following the end of the tax year.