Clampdown on 'bed and spousing'?

A clampdown on the 'artificial' creation and use of capital losses by individuals and trustees may soon be put in place. But how such planning can be regulated by HM Revenue & Customs HMRC is questionable, say business and financial advisers Grant Thornton.

HMRC introduced draft legislation in the 2006 Pre-Budget Report PBR that sought to prevent the 'artificial' creation and use of capital losses where arrangements had been made to guarantee a tax advantage. These rules are now being debated as they form part of the Finance Bill 2007, currently subject to Parliamentary scrutiny.

However, the guidance accompanying the legislation, that explains HMRC's interpretation of the law, is not subject to the same formal examination and it is this guidance that has raised a number of queries about how the new rules will be applied.

Ian Luder, tax partner at Grant Thornton, says: "Grey areas do not embed confidence in the general public and are even a good scare tactic for those using legislation in a smart but legal way."

Guidance was issued by HMRC on draft rules last December, focusing on capital losses where there is no genuine commercial loss or genuine commercial disposal.

One of the examples that HMRC cited in its guidance concerned so-called 'bed-and spousing'. In its example, one spouse, Jane, sells an asset for a gain and the other, John, holds an asset standing at a loss. John transfers a half share of their asset to Jane at nil gain/nil loss. When they jointly sell the asset to a third party they realise the loss. Jane can then use the loss to offset her share of the gain on the sale of their asset.

HMRC's 2006 guidance stated that the anti-avoidance legislation would not apply in this scenario as, despite the inter-spouse transfer, they had recognised a real, commercial loss on the subsequent sale.

However, new guidance issued by HMRC at the time of the 2007 Budget uses two different examples.

If Mary sells shares at a loss and then Mike purchases them shortly after without the prior knowledge of the disposing spouse, the anti-avoidance rules would not apply. Where the rules would apply, however, is when the spouses make arrangements between themselves for the shares to be re-acquired.

"This is a ridiculously tricky concept. Judging whether spouses or civil partners have discussed their individual and joint finances, and to what depth, could prove extremely challenging and ambiguous," says Luder.

Although anti-avoidance rules for companies have been in place since December 2005, these will be replaced by the new rules that also cover individuals and trustees first announced in the 2006 PBR as soon as the Finance Bill has been passed. The legislation will be effective for disposals made on or after December 6th 2006.

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2007-05-31 09:58:54 © Moneyextra.com