Disposals to family members – beware of the ‘market value’ rule

The calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the sum received for the sale of that asset and the cost of acquiring (including associated costs etc). However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.

Transfers of assets between spouses and civil partners are deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.

Where two persons are connected (i.e. sibling, child, parent), the actual sum paid, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss. This may give rise to an unexpected tax liability so it is always wise to check with a tax adviser before such a transaction takes place.