Responding to Nickâs post.
The A/[A+B] formula is used to ascertain the part of the original base cost of an asset which is attributable to a part disposal. The âBâ refers to the MV of the part of the asset retained by the vendor/donor.
I donât believe âBâ can exceed the MV of the whole asset as Nick seems to suggest.
Assume X owns 100% of a property (P). Xâs base cost of P is 100,000.
Xâs ownership of P includes the right to any rental income which might be generated from P.
X gifts 40% of P to Y but X retains the right to future rental income generated from Pâs 40%. Presumably for a 40% share of the property (ignoring discounts for part ownership) would normally be worth 40% of 100,000 to Y but as X retains the right to future rental income Y will only pay (say) 30,000 ie the normal MV of a 40% interest (ie 40,000) is reduced by the present value of a future rental income stream discounted at an appropriate rate (say,10,000 in this example).
For X the capital gain on the sale is 30,000 less an apportionment of Xâs original base cost ie [100,000 x [30,000/[30,000 + 70,000]]] ie a capital gain of nil.
âBâ the MV of the retained part being 60% of 100,000 plus the PV of the retained future rental income stream on the 40% sold to Y (10,000).
Is not what has happened in the above that X has carved out a right to future rental income arising on Yâs 40% and then gifted the 40% capital value minus rental income rights? In which case no GROB occurs (X not having any right to share in Yâs 40% capital value)? Therefore no need for FA 1986 s102B(3) protection?
Presumably, as an alternative, X could settle 40% of P on trust but retaining a life interest followed by remainder to Y. The trust would be settlor interested and to preclude a GWROB FA 1986 s102B(3) protection would be needed?
Malcolm Finney
Malcolm Finney