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HM Revenue and Customs Brief 09/09

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HM Revenue and Customs -Tax Authorities

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Issued 20 March 2009

Capital Gains Tax: rebasing rules Finance Act 2008 and Partnerships

Introduction

This Revenue & Customs Brief is about assets held by a partnership on 31 March 1982. Assets held on that date are subject to special rules (the 'rebasing' rules) when working out capital gains and losses.

The changes to Capital Gains Tax in Finance Act (FA) 2008 amended the rebasing rules. The changes apply to disposals of assets from the start of the 2008-09 tax year (6 April 2008). The Brief explains how the rebasing rules apply for people who dispose of partnership assets or who change their share of partnership assets from 2008-09 onwards.

The Brief applies only to partners whose capital gains are subject to Capital Gains Tax. The changes in FA 2008 do not apply to Corporation Tax and companies liable to Corporation Tax on their gains are not affected.

Contents

The brief covers:

  • Rebasing rules for disposals before 6 April 2008.
  • Rebasing rules for disposals on or after 6 April 2008.
  • Statement of Practice 1/89 (SP1/89).
  • Appendix A: Examples for disposals before 6 April 2008.
  • Appendix B: Examples for disposals on or after 6 April 2008.

Background

Partnerships, including Scottish partnerships, are treated as transparent for Capital Gains Tax purposes. This means that any gains or losses accruing on disposals of partnership assets are chargeable on the partners rather than on the partnership itself. Partners are treated for this purpose as owning fractional interests in each of the partnership's assets. Disposals occur when the partnership disposes of an asset or when a partner's interest in an asset is reduced.

Statement of Practice D12 (SP D12) explains how gains or losses accruing on disposals of interests in partnership assets are to be computed.

Section 6 and Schedule 2 FA 2008 make rebasing of cost to 31 March 1982 compulsory for assets held at that date. The changes have effect only for the purposes of Capital Gains Tax. They do not apply for the purposes of Corporation Tax on chargeable gains.

Rebasing rules for disposals before 6 April 2008

The rebasing provisions for disposals before 6 April 2008 applied in respect of disposals on or after 6 April 1988 of assets held on 31 March 1982.

Assets held at 31 March 1982 were treated as if they had been acquired at their market value on that date so that gains or losses relating to changes in value before that date were not taken into account for Capital Gains Tax purposes. This approach was modified by the kink test which allowed for a comparison of the gain or loss based on the market value of the asset on 31 March 1982 with the gain or loss based on the actual cost before 31 March 1982. The lower of the gains was chargeable to Capital Gains Tax or the lower of the losses was allowable. If one computation resulted in a gain and the other in a loss, the person making the disposal was treated as realising neither a gain nor a loss.

A person could opt out of the kink test by electing under section 35 (5) Taxation of Chargeable Gains Act (TCGA) 1992 to have gains or losses computed as if all of their assets held on 31 March 1982 had been acquired at their market value on that date.

Section 35 (7) TCGA 1992 required separate rebasing elections to be made by a person who held assets in more than one capacity. For example, an election made by an individual in respect of personal assets would not cover interests in partnership assets held by that individual in his or her capacity as a partner.

There were special rules for arriving at the expenditure allowable in computing the gain on the disposal of an asset which had been acquired since 31 March 1982 by way of a statutory 'no gain/no loss transfer' (a disposal which is treated for Capital Gains Tax purposes as resulting in neither a gain nor a loss for the person making the disposal) or an unbroken series of such transfers. The gain was computed as if the person making the disposal had owned the asset at 31 March 1982.

Examples of how these rules applied in relation to disposals of interests in partnership assets are included in Appendix A (PDF 60K)  http://www.hmrc.gov.uk/briefs/cgt/brief0909-app-a.pdf to this Revenue & Customs Brief.

Rebasing rules for disposals on or after 6 April 2008

Section 6 and Schedule 2 FA 2008 apply in respect of disposals on or after 6 April 2008 of assets held at 31 March 1982.

Gains or losses arising on disposals on or after 6 April 2008 are computed as if the assets disposed of had been acquired at their market value on 31 March 1982. In effect, allowable expenditure is 'rebased' to 31 March 1982 thus dispensing with the need for the kink test and rebasing elections.

The new section 35A TCGA 1992 applies where a person ('P') disposes of an asset on or after 6 April 2008 and:

  • P acquired the asset after 31 March 1982 and before 6 April 2008 under a statutory no gain/no loss provision and
  • any previous disposal and acquisition of the asset after 31 March 1982 was one to which a statutory no gain/no loss provision applied and
  • rebasing under section 35 (2) TCGA 1992 did not apply to the relevant disposal, that is, the disposal of the asset to P

Where these conditions are satisfied section 35A (2) TCGA 1992 provides that the allowable expenditure taken into account in computing a gain or loss when P disposes of the asset on or after 6 April 2008 includes the value of the asset at 31 March 1982 and the indexation allowance due for the period from 31 March 1982 to the month in which P acquired the asset or, if earlier, to April 1998. The previous approach of treating P as having owned the asset at 31 March 1982 with the appropriate consequences for indexation allowance no longer applies.

Examples of how these rules apply in relation to disposals of interests in partnership assets are included in Appendix B (PDF 56K) to this Revenue & Customs Brief.

Statement of Practice 1/89 (SP1/89)

SP1/89 explains HM Revenue & Customs (HMRC) practice in relation to rebasing and indexation allowance where a transfer between partners of an interest in an asset that was held by a partnership on 31 March 1982 results in neither a gain nor a loss.

It enables transfers between partners of interests in partnership assets that result in neither gains nor losses to be treated as statutory no gain/no loss transfers for the purposes of the rebasing rules in sections 35 and 36 and Schedule 4 TCGA 1992. Partners who dispose of interests in assets that had been acquired by them as a result of such transfers are treated as having held them on 31 March 1982.

SP1/89 provides that the disposal consideration for a transfer between partners of an interest in a partnership asset that results in neither a gain nor a loss may be calculated on the assumption that an unindexed gain will accrue to the transferor equal to the indexation allowance so that, after accounting for indexation allowance, neither a gain nor a loss accrues. Such a disposal may be treated as a statutory no gain/no loss disposal for the purposes of section 55 (5) TCGA 1992.

For Capital Gains Tax purposes indexation allowance was frozen as at April 1998 and has been abolished for disposals on or after 6 April 2008.

For disposals of interests in partnership assets that occur on or after 6 April 2008 SP1/89 will apply only in relation to corporate partners whose capital gains are chargeable to Corporation Tax.

Disposals on or after 6 April 2008

HMRC's practice in relation to rebasing for disposals by non-corporate partners on or after 6 April 2008 will be consistent with the previous treatment under SP1/89. Transfers between partners of interests in partnership assets after 31 March 1982 and before 6 April 2008 that resulted in neither gains nor losses may be treated as statutory no gain/no loss transfers for the purposes of section 35A (1)(b) TCGA 1992.

Where section 35A (2) TCGA 1992 applies in relation to disposals on or after 6 April 2008 the allowable expenditure to be taken into consideration in the calculation of a gain or loss includes the value of the asset at 31 March 1982 and any indexation allowance for the period from 31 March 1982 to the month in which the person making the disposal acquired it or, if earlier, to April 1998.

The effect of SP1/89 in relation to disposals of interests in partnership assets before and on or after 6 April 2008 is considered in the examples in Appendices A and B.


About the Author

Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-03-23 09:24:25 in Tax Articles

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