This note is relevant to couples who are
- married or in a civil partnership; and
- each has a will saying ‘all to the other’;
- where it is likely that one partner in particular (x) will predecease the other; and
- both are tax resident (and the recipient is domiciled) in the UK; and
- they own assets with substantial unrealised gains on which Capital Gains Tax (‘CGT’) would be due if sold.
In these circumstances if the spouse who is likely to survive
- transfers all their investments that have inbuilt capital gains to their spouse who is likely to die first; so
- s/he dies possessed of all assets with inbuilt capital gains owned by the couple; and
- by their will all such assets are inherited by their surviving spouse;
- s/he will inherit them at a restated CGT base cost equal to the market value of each asset on x’s date of death.
This planning is described further below. What follows comes from material published by the body set up by HMRC to decide if tax planning is or is not ‘acceptable’.
Gifts between spouses
This example is intended to show standard tax planning on gifts between spouses.
This example considers the CGT position on an arrangement involving a gift of shares between spouses, followed by the death of the spouse receiving the gift.
In January 2012 Mr and Mrs Jones are told that Mrs Jones is terminally ill. In February Mr Jones gives his shares in an investment company, which are standing at a significant gain, to his wife. Under the terms of her Will as drafted at the date of the gift he will inherit those shares when she dies. Mrs Jones has full capacity at the time of the gift.
Mrs Jones dies in June and the shares pass to Mr Jones under the terms of her Will. Mrs Jones has not executed a new Will since the gift.
The relevant tax provisions
Sections 58, 62(1)(b) and 62(4)(a) Taxation of Chargeable Gains Act 1992 (‘TCGA’)
The taxpayer’s tax analysis
The gift of the shares is a transfer between a husband and wife who are living together. This transaction is treated, by s58 TCGA as taking place for such consideration as will give rise to neither a gain nor a loss.
All the assets of the deceased which pass to his or her personal representatives are deemed to have been acquired by them, at market value, at the date of death under s62(1)(b)TCGA. When beneficial ownership of any asset of the estate passes from the personal representatives to a beneficiary, S62(4)(a) TCGA provides that no chargeable gain shall accrue to the personal representatives.
In summary, there is no chargeable gain on the gift of shares by Mr Jones to Mrs Jones and Mr Jones re-acquires the shares at market value at the date of his wife’s death. In effect, the gain that has accrued during the earlier ownership of shares by Mr Jones has disappeared.
What is the analysis under the tax general anti abuse rule
The main purpose of the arrangement is to obtain a tax advantage. The gift of shares was made by Mr Jones in the hope of washing out the gains on the understanding that his wife would leave them back to him.
Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions?
Yes. The principle of s58 TCGA is to allow assets to be transferred between spouses and between civil partners on the basis of no gain/no loss.
Assets passing on death to personal representatives are treated as taking place at market value and no gain is charged when the assets are passed to the beneficiaries.
Do the means of achieving the substantive tax results involve one or more contrived or abnormal steps?
The means of achieving the tax results depend upon the gift, the death of Mrs Jones and her choosing to leave the shares to Mr Jones in her Will. There are no abnormal or contrived steps here; the transactions are normal arrangements between spouses or civil partners.
Are the arrangements intended to exploit any shortcomings in the relevant tax provisions?
Do the tax arrangements accord with established practice and has HMRC indicated its acceptance of that practice?
Yes. HMRC sets out in its instruction manuals how these transactions are to be treated for Capital Gains Tax purposes.
These arrangements can be regarded as a reasonable course of action in relation to the tax provisions having regard to all the circumstances. The general anti abuse rule would not apply.
An alternative arrangement – What if the facts were the same as those above but the gift of shares was made on the day of Mrs Jones’ death?
HMRC’s view is that so long as Mrs Jones was in full capacity at the time of the gift the analysis would be the same and that the general anti abuse rule would not apply. This assumes of course that the gift was validly completed prior to death.
The ability to plan in this way is potentially very valuable to clients. Other taxes such as Stamp Duty, Stamp Duty Land Tax and Inheritance Tax need to be considered. If you think I can help, please get in touch.