Mark McLaughlin highlights tax planning on gifts between spouses or civil partners that might help some couples at a time they would probably prefer not to think about
“In this world nothing can be said to be certain, except death and taxes.” This is a well-known quotation attributed to Benjamin Franklin. To prefer not to think about one’s own mortality is normal and natural. However, tax is a consideration both during lifetime and on death. It is therefore prudent to consider steps to mitigate tax in respect of each.
Most taxpayers (and advisers) associate death with inheritance tax (IHT). However, in some cases forward planning is possible for other tax purposes.
For example, married couples (or those in civil partnerships) can achieve capital gains tax (CGT) savings by making gifts between themselves, particularly in unfortunate circumstances where the life expectancy of one spouse is shorter than the other’s.
The gift of a valuable asset (e.g. shares in an investment company) between connected persons is normally treated as a disposal at market value for CGT purposes (TCGA 1992, s 18). However, gifts between spouses living together are generally treated as made on a ‘no gain, no loss’ basis (s 58(1)).
On death, a deceased individual’s assets are deemed to be acquired by his or her personal representatives at market value. When an estate asset passes from the personal representatives to a beneficiary, no chargeable gain arises; in effect, there is generally a potential CGT-free uplift in the value of the asset on death (TCGA 1992, s 62). These provisions can have beneficial results.
Example: Gift of investment properties
John and Karen are married, and both resident and domiciled in the UK. Unfortunately, Karen has recently been diagnosed with a terminal illness, and her life expectancy is less than a year. John owns several investment properties in London, which are mortgage-free and standing at a significant capital gain. He transferred the properties to Karen. Under the terms of her will (prepared some years previously), Karen’s estate passes on death to John.
Sadly, Karen died eight months later, leaving her entire estate (including the properties) to John.
The transfer of the investment properties from Karen to John was free of CGT. John receives the properties back on Karen’s death, uplifted to market value. John might consider selling the properties shortly afterwards, with little or no CGT to pay.
While this article only considers the CGT position, it should be noted that there is an IHT exemption for transfers (i.e. lifetime and on death) between spouses (or civil partners).
In the above example, John’s investment properties were gifted to Karen, and Karen’s estate (including the properties) passed to John, without an IHT charge on each occasion.
Not abusive – but acceptable?
Tax planning these days often needs to carry a ‘health warning’. For example, a general anti-abuse rule (GAAR) is aimed at counteracting ’abusive’ tax arrangements. The effect of the GAAR applying to an abusive tax arrangement is broadly to counteract its tax advantage by adjustment on a ‘just and reasonable’ basis (FA 2013, s 209(2)). Furthermore, a penalty of 60% can be imposed (FA 2013, s 212A(2)). Could HMRC challenge the above tax planning as being abusive?
HMRC’s guidance on the GAAR contains examples of arrangements which are, and are not, considered to be abusive (see tinyurl.com/GAAR-PartD). The guidance includes an example (at D19) illustrating ‘standard’ tax planning along similar lines to the above example (i.e. a CGT arrangement involving a gift of shares between spouses, followed by the death of the recipient spouse several months later).
It concludes that the GAAR would not apply. In addition, the guidance states HMRC’s view that the GAAR would not apply even if the gift of shares in that example was made on the day of death (as long as the recipient spouse was in full capacity at the time of the gift, and assuming that the gift was validly completed prior to death).
However, the fact that an arrangement is not ‘caught’ by the GAAR does not mean that it has been approved. HMRC may still seek to challenge the arrangement under existing legislation. Alternatively, targeted anti-avoidance legislation could be introduced in the future.
On the face of it, the ‘standard’ tax planning pointed out in HMRC’s guidance could make potential CGT liabilities disappear in certain (albeit often unfortunate) circumstances. However, all of the tax (and non-tax) implications need to be considered. For example, the IHT exemption for transfers between spouses is subject to restriction if the recipient spouse is not domiciled in the UK (IHTA 1984, s 18(2)). In addition, the gift of investment properties by John in the above example could have resulted in a stamp duty tax liability if outstanding mortgages existed on the properties, and these were taken over by Karen (FA 2003, Sch 4, para 8(1)(b)).