Capital gains tax

Second-hand debts and divorce

When dealing with debts on divorce, it is important to remember that the tax treatment of simple debts may change if one party transfers a receivable to the other party.

Section 251(1), Taxation of Chargeable Gains Act 1992 (TCGA 1992) states that “where a person incurs a debt to another, whether in sterling or in some other currency, no chargeable gain shall accrue to that (that is the original) creditor or his personal representative or legatee on a disposal of the debt”. This means that an individual can lend money and receive a repayment without it creating a chargeable disposal for capital gains tax (CGT) purposes.

However, if the debt is transferred and it becomes a “second-hand debt” then the recipient will have a chargeable disposal for CGT purposes when the debt is repaid. The recipient could include the spouse of the original creditor. While a couple are married, there may be no good reason to transfer a debt and therefore create a potential exposure to CGT. However, it is possible that a transfer could take place on divorce.

Section 58, TCGA 1992 treats disposals between spouses, including separated spouses in particular circumstances, as taking place on a no gain, no loss basis. This means that if Spouse A transfers a loan to Spouse B, Spouse B will be deemed to acquire the loan at Spouse A’s base cost. However, Spouse B will still have a second-hand debt for CGT purposes.

If the loan is denominated in sterling, this might not matter too much. If Spouse A made a loan of £100,000 and Spouse B receives a repayment of £100,000, there should be no capital gain (although there may be a requirement to report the disposal). However, if the loan is denominated in another currency, the position could be quite different. For example, if Spouse A made a loan for $100,000 when the exchange rate was 0.8 (£80,000), and Spouse B receives a repayment of $100,000 when the exchange rate is 0.9 (£90,000), then Spouse B will have a chargeable gain of £10,000 (£90,000 - £80,000). Had Spouse A received the loan repayment, there would be no chargeable gain.

When advising clients in the process of divorce, we may therefore wish to consider the following points:

1. What is the impact of historic exchange rate fluctuations? Is there a latent capital gain or loss?
2. Could Spouse A retain the debt and transfer a different asset?
3. When is the loan due to be repaid? Could it be retained by Spouse A, and the cash repayment transferred to Spouse B at a later date?
4. Could the debt be refinanced such that Spouse B is the original creditor of a new loan?
5. If the loan is to a close company, could Spouse A capitalise the loan and transfer shares instead? This would deal with any latent capital gain based on historic exchange rate changes but not future changes.

Provided by Alexandra Britton-Davis, Partner, Saffery LLP

Claiming losses and reporting gains in respect of cryptoassets

A person can claim a capital loss under s24(2), Taxation of Chargeable Gains Act 1992 (TCGA 1992) in respect of a cryptoasset they still own if it becomes of negligible value. 

As a result of making the claim, the person is deemed to dispose of the asset and immediately reacquire it for the amount specified in the claim. This gives rise to a capital loss. HMRC’s guidance states that as tokens are pooled under s104, TCGA 1992, the negligible value claim needs to be made in respect of the whole section 104 pool, not the individual tokens.

For HMRC’s guidance on making a negligible value claim generally see CG13120P, and for guidance on claims relating to cryptoassets see CRYPTO22500 for individuals and CRYPTO41450 for companies. 

Where a person who is not otherwise required to submit a self assessment tax return has made a capital gain on the disposal of a cryptoasset, they may wish to consider reporting the gain and paying the tax using HMRC’s real-time CGT service as an alternative to registering for self assessment. This is considered in a recent tax news article. 

For further guidance on cryptoassets, see ICAEW’s TAXguide 01/2024 for individuals and TAXguide 02/2024 for companies. 

FTT allows claim for entrepreneurs’ relief despite shareholding percentage error 

The First-tier Tribunal (FTT) has allowed a taxpayer’s appeal concerning a failure to satisfy the statutory conditions of a tax relief, caused by an unintended mistake. 

The taxpayer agreed to invest in a company with a clear intention of being entitled to capital gains tax entrepreneurs’ relief (since renamed business asset disposal relief) on a future disposal. This required, among other things, for the taxpayer to hold at least 5% of the ordinary share capital. However, due to a spreadsheet rounding mistake when the share issue was calculated, the taxpayer held only 4.99998% and HMRC denied a claim for relief following the disposal of the shares. 

On the basis of the evidence before it, including the existence of an anti-dilution clause, the FTT agreed that all the relevant parties had a common intention that the taxpayer would receive the necessary 5%. Although the FTT does not have power to order rectification of the faulty legal documentation, it found that the facts and circumstances were such that there was a high degree of certainty that, if the parties were to apply for it, the High Court would grant rectification of the original share issue documents. Applying case law set out in the 2015 Upper Tribunal decision Lobler, the FTT proceeded as if such rectification had been ordered, which was sufficient to allow the tax appeal.

Jonathan Cooke v HMRC [2024] UKFTT 272 (TC)

From the Business Tax Briefing dated 19 April 2024, published by Deloitte

Income tax

Upper Tribunal dismisses appeal on seed enterprise investment scheme

The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) decision that investments in a company did not qualify for the seed enterprise investment scheme (SEIS) as there were disqualifying arrangements. 

The company was incorporated to exploit the intellectual property rights to an animation programme and related spin-offs. The originator of the concept was a director within a group of companies (the Group) that operated a fund for investors to subscribe for shares in creative companies. An anti-avoidance provision denies SEIS relief where there are disqualifying arrangements. This includes where shares are issued subject to arrangements whose main purpose is to generate access to tax relief and the benefit of the investment is passed to another party to the arrangements.

The FTT had found that disqualifying arrangements existed, preventing relief for investors under the SEIS. Over half of the capital raised was paid by the media company under a production services agreement to a member of the Group. The media company argued that the company to which the payment was made was not party to the arrangements, but the FTT disagreed, noting the extensive involvement of members of the Group in virtually every aspect of the arrangements.

The UT upheld this decision. The taxpayer’s appeal on the basis that the company was not a party to the arrangements was dismissed. The shares were issued due to a disqualifying arrangement.

Coconut Animated Island Ltd v HMRC [2024] UKUT 75 (TCC)

From Tax Update April 2024, published by Evelyn Partners LLP

Trusts

First-tier Tribunal allows appeal on beneficial ownership of a property

The First-tier Tribunal (FTT) accepted a taxpayer’s evidence that a property he legally owned was held on trust for his brother. He had evidence that his brother had contributed, and that due to his brother’s bankruptcy finance could only be taken out in the taxpayer’s name.

After nine years of full ownership, the taxpayer transferred a house to his sister-in-law for less than market value. HMRC raised a discovery assessment, but he argued that he was only the legal owner of the house, not the beneficial owner.

The taxpayer had owned the leasehold of the property since 1989. His brother had traded from the property since that date. Nine years ago, the freehold came up for sale, but his brother, a recent bankrupt, could not obtain a loan to buy it. The taxpayer bought it in his name. Leasehold and freehold were later transferred to his sister-in-law.

The taxpayer argued that his brother had given him money for the leasehold purchase, and that though he had taken out a loan in his own name for the freehold purchase, this was on the understanding that it was on his brother’s behalf. He had contributed none of his own money to the purchases. The transfer to his sister-in-law was agreed as having a loan in his own name was affecting his credit rating.

The FTT accepted the taxpayer’s evidence and upheld the appeal. Although there was no trust deed to show beneficial ownership, the taxpayer had shown bank statements showing his brother’s contribution, and the justification that he was unable to obtain credit as a bankrupt was entirely plausible. Both parties clearly understood the beneficial ownership throughout.

Raveendran v HMRC [2024] UKFTT 273 (TC)

From Tax Update April 2024, published by Evelyn Partners LLP