Enter Your E-mail

‘Value shifting’ occurs when the value of a property is altered as a result of passing an interest in the property to another.

Anti-avoidance rules are in place whereby such disposals are deemed to be chargeable to CGT despite there being no consideration involved. In these situations the ‘market value’ rule is deemed to operate and the person transferring the value is liable to CGT based on the amount which he or she could have obtained for the transfer, if the parties had been at arm’s length.

The main instances where these anti-avoidance rules operate are in the situation were the owner of a freehold property effectively changes the type of ownership by disposing of the freehold while granting a leasehold to himself or herself, thereby reducing the value of the property. Any subsequent alteration to the lease will automatically result in a CGT charge despite no consideration having been received.

Example: 
Mr James owns a commercial property currently valued at £200,000 with an original purchase price of £120,000. If he gifts the property to his son, with no consideration, the transaction would be treated as if he had sold at the ‘market value’ as the two are ‘connected persons’. So he gives the freehold to his son, granting himself a lease for 99 years at a rent of £1 per year. The value of the freehold will be negligible.

He then arranges for the lease to be altered so that the rent is at the market rate resulting in the increase in value of the freehold. The change in the terms of the lease is an example of ‘value shifting’ because the lease itself has become less valuable but the freehold more valuable.
At the date of alteration of the lease Mr James will be charged to CGT on the basis that he has disposed of an asset equal to the value transferred. If the value of the £1 per year lease was £200,000 and the ‘market value’ lease £60,000, the value transferred would be £140,000.

The corresponding deductible cost is calculated in proportion to the value deemed to be transferred (£140,000), against the original value (£200,000).
£140,000 x £120,000 = £84,000
£200,000

Capital Gains calculation:

Deemed Proceeds       £140,000
Less value transferred £(84,000)
Chargeable Gain          £ 56,000