CGT and IHT

[google]

I suspect I'm going to have to get professional advice but I thought
I'd ask here first.

I have a property that I own 99%, with my partner owning 1%. What I'm
considering is crystallizing the gains by giving or selling another
98% to my partner. (We are not married)

The intention would be for me to take back ownership - for two main
reasons, 1. she doesn't want the worry of owning a property that she
doesn't live in and 2. if property prices do fall, the a CGT loss is
more likely to be of use to offset other gains to me than to her.

If I gift the property to her and then I die, the gift will count
towards IHT. But as she gets the rest of my estate anyway that
shouldn't matter. The complication occurs if she then gifts it back to
me. If I die then will she still have to pay IHT on the gift that she
no longer owns? Note that my share of the property goes to charity if
I die if that makes any difference.
I don't think her estate would be anywhere near paying IHT so that is
simple.

But I could also sell the property to her. I could achieve that by
lending her the money to buy it from me (if necessary I could transfer
the actual funds into her bank account, this would not need to be a
theoretical loan where the funds have never existed). Presumably that
way there would be no IHT liability if either of us die.

Am I allowed to lend her approximately 100K at 0% with no fixed
repayment schedule? Would it be OK to say that the loan can be repaid
at any time by either paying the money or returning the share of the
property even if property prices have fallen?
Are there any tax implications for her if I lend her 100K?

Finally, if we do decide to go with this scheme, is a simple letter
saying "I gift you a further 98% of <property> on identical terms to
the deed of trust dated <date>" or "I hereby sell you 98% of
<property> for <amount>." ok?

Tim.

 

[Ronald Raygun]

I suspect I'm going to have to get professional advice but I thought
I'd ask here first.

I have a property that I own 99%, with my partner owning 1%. What I'm
considering is crystallizing the gains by giving or selling another
98% to my partner. (We are not married)

The intention would be for me to take back ownership - for two main
reasons, 1. she doesn't want the worry of owning a property that she
doesn't live in

Presumably you live with your partner, and terefore I gather that the
property in question is not your home, and therefore the CGT issue
arises in case you should sell it.

and 2. if property prices do fall, the a CGT loss is
more likely to be of use to offset other gains to me than to her.

Fair enough.

If I gift the property to her and then I die, the gift will count
towards IHT. But as she gets the rest of my estate anyway that
shouldn't matter.

Meaning what? Why shouldn't it matter? Because the rest of the estate
is sufficient from which to pay any IHT due? That's small comfort!

The complication occurs if she then gifts it back to
me. If I die then will she still have to pay IHT on the gift that she
no longer owns?

Yes, I believe so. The trick, of course, is to make sure that neither
of you dies within 7 years of making the gift.

Consider marrying. Seriously, that would wipe out the IHT problems,
but would close the route to crystallising capital gains.

Note that my share of the property goes to charity if
I die if that makes any difference.

Then your share would not attract IHT.

I don't think her estate would be anywhere near paying IHT so that is
simple.

But I could also sell the property to her. I could achieve that by
lending her the money to buy it from me (if necessary I could transfer
the actual funds into her bank account, this would not need to be a
theoretical loan where the funds have never existed). Presumably that
way there would be no IHT liability if either of us die.

Yes there would. If you sell the property to her, you crystallise a
gain. Then, if you want to take the property back, she could sell it
back to you. You would then still own it and therefore it would still
form part of your IH taxable estate. However, if, as you say, you will
leave the property to charity, then it won't be taxed. You'd have to make
sure your partner put a similar provision into her will. Otherwise there
is a possibility she might die just after buying it from you but before
she could sell it back.

Am I allowed to lend her approximately 100K at 0% with no fixed
repayment schedule?

I don't see why not.

Would it be OK to say that the loan can be repaid
at any time by either paying the money or returning the share of the
property even if property prices have fallen?

That would be more difficult.

Are there any tax implications for her if I lend her 100K?

Yes. If you lend her the money, she will owe it to you. The debt is an
asset as far as your estate is concerned, and will be taxed as such.

Finally, if we do decide to go with this scheme, is a simple letter
saying "I gift you a further 98% of <property> on identical terms to
the deed of trust dated <date>" or "I hereby sell you 98% of
<property> for <amount>." ok?

Probably, but it would be better to send a copy to the taxman,
to make it "official".

 

[google]

(e-mail address removed) wrote:
Presumably you live with your partner, and terefore I gather that the
property in question is not your home, and therefore the CGT issue
arises in case you should sell it.

Actually we don't live together. We each have our own houses. But this
is yet another one.

Meaning what? Why shouldn't it matter? Because the rest of the estate
is sufficient from which to pay any IHT due? That's small comfort!

No, merely that, currently, if I die my share of the property goes to
charity so she won't see any of it, not will have any IHT liability as
a result of it. If I gift my share to her then any IHT liability as a
result of the gift will still leave her better off than if I hadn't
gifted it to her at all.

My primary concern is to ensure that she cannot become worse off as a
result of me trying to crystallize my CGT liability.

Yes, I believe so. The trick, of course, is to make sure that neither
of you dies within 7 years of making the gift.

I'd hope that would be the case, but ...

Consider marrying. Seriously, that would wipe out the IHT problems,
but would close the route to crystallising capital gains.

Although then it would mean that we couldn't each have a CGT exempt
house. And we'd need a huge combined house if her tidiness wasn't
going to encroach on my messiness ;-)

Then your share would not attract IHT.

But if my share was a gift from her that was originally a gift from me
then she could end up having to pay IHT. And, much worse, not have the
asset to pay that liability.

Yes there would. If you sell the property to her, you crystallise a
gain. Then, if you want to take the property back, she could sell it
back to you. You would then still own it and therefore it would still
form part of your IH taxable estate. However, if, as you say, you will
leave the property to charity, then it won't be taxed. You'd have to make
sure your partner put a similar provision into her will. Otherwise there
is a possibility she might die just after buying it from you but before
she could sell it back.

But surely then my loan would be a liability on her estate which could
be paid off by returning the property to me.

My goal here is to minimize my possible CGT bill in the future. As a
result I'm prepared to take some risks - that she dies while owning
the property, that she runs off with someone else and decides to sell
her share, etc. But I want to make sure that nothing I'm planning can
leave her worse off.

I don't see why not.


That would be more difficult.

Presumably however, I could gift her money out of income that she
could then use to pay off the loan. So if currently I'm saving X per
month, I could instead gift that to her and then she could immediately
return it to me repaying the loan. That way, I suppose, if there was a
shortfall when she sold it back to me the debt could be paid off
fairly quickly. Also, presumably, if she were to die I could gift any
outstanding amount to her estate.

The only significant risk I could see to her is if property prices
fell dramatically and I was made bankrupt.

Yes. If you lend her the money, she will owe it to you. The debt is an
asset as far as your estate is concerned, and will be taxed as such.

But she would own the property which would have reduced the size of my
estate. So the net effect should be zero. (And, presumably, if she
wanted to, she could "repay" the loan by returning the property to my
estate and then gift the property to charity meaning that she would be
in exactly the same position as if she'd never owned it)

Probably, but it would be better to send a copy to the taxman,
to make it "official".

Thanks for your help.

Tim.

 

[RobertL]

(e-mail address removed) wrote:

Meaning what?  Why shouldn't it matter?  Because the rest of the estate
is sufficient from which to pay any IHT due?  That's small comfort!

I think the OP means that if he gifts it to her and dies within 7
years the gift will still be in his estate. So it would make no
difference if he held on to it and let her inherit it later - the
estate would be the same size. It wouldn't be exactly the same size
of course, because the value of the asset would change in the
meantime.

Also the OP should consider this:. If he dies owning the house then
the capital gain it has made will not be taxed; there is no CGT on
assets held at death. It is better for her to inherit the house rather
than for him to sell the house (pay CGT) and have her inherit the
(remaining)money.

I agree marriage is good idea. But the OP should note that they need
to be married at the time of the gift. It's not enough to be married
at the time of the death.


Robert

 

[Ronald Raygun]

Actually we don't live together. We each have our own houses. But this
is yet another one.

Ah, a loose partnership. Very nice if you can get it. Or do you mean
that you only "don't live together" on paper?

Although then it would mean that we couldn't each have a CGT exempt
house.

So it would.

But if my share was a gift from her that was originally a gift from me
then she could end up having to pay IHT. And, much worse, not have the
asset to pay that liability.

When you say "she could end up having to pay IHT", do you mean "she" as in
"her estate" or as in "your estate"?

If you gift it to her and then she gifts it to you, and then she dies
before you do, the house she gifted to you (or its value) would be clawed
back into her estate. Assuming you would be the sole beneficiary of her
estate, it would become your problem. But you would still have the asset.
You could sell this 3rd house to help pay any IHT due. The charity to whom
you would have left the house would then lose out, but you could still leave
them the rest of the cash from the sale, or indeed your 1st house.

If you gift it to her and then she gifts it to you, and then you die before
she does, then the fact that you first gifted it to her means it will still
count as part of your estate. Bizarrely, it would appear to count *twice*,
once from your gift, and then again because you've had it back again! If
you *also* left it to charity, the second part wouldn't count, but the
potential embarrassment from the 1st part would still remain.

What you could do is have her wait 7 years after you gift it to her, before
she gifts it back to you, and as soon as she gifts it back to you, you could
change your will so that the charity only gets the house if you survive for
a further 7 years, and that otherwise, i.e. if you die less than 7 years
after receiving the return gift, then the charity will only get the
residual value of the house after any IHT due on it has been paid. That's
still better than nothing for the charity, and I'm assuming there is no
special value to the charity in the house itself, and that, were the charity
to inherit it, it would sell it off anyway.

But surely then my loan would be a liability on her estate which could
be paid off by returning the property to me.

Yes, OK, subject to there not being a substantial drop in value in
the intervening period.

My goal here is to minimize my possible CGT bill in the future. As a
result I'm prepared to take some risks - that she dies while owning
the property, that she runs off with someone else and decides to sell
her share, etc. But I want to make sure that nothing I'm planning can
leave her worse off.


Presumably however, I could gift her money out of income that she
could then use to pay off the loan.

That seems fine.

But she would own the property which would have reduced the size of my
estate. So the net effect should be zero. (And, presumably, if she
wanted to, she could "repay" the loan by returning the property to my
estate and then gift the property to charity meaning that she would be
in exactly the same position as if she'd never owned it)

Yes, that's fine provided the house value doesn't drop so much that the
loan could not be repaid from it.

 

[tim \(not at home\)]

(e-mail address removed) wrote:


Probably, but it would be better to send a copy to the taxman,
to make it "official".

No that most certainly won't do. The transfer has to be properly
conveyenced, stamped and registered, with all duties and fees, as
appropriate, paid.

tim

 

[google]

No that most certainly won't do. The transfer has to be properly
conveyenced, stamped and registered, with all duties and fees, as
appropriate, paid.

Hmmm. Good point. I'd completely forgotten about stamp duty. I'm
pretty sure that this house will be below the 1% stamp duty threshold.

But when I gave her the 1% I didn't have to do any "stamping" or
"registering" and I used a solicitor for that so I'd assume that it
was done correctly. AIUI, by not having her ownership registered I
could theoretically sell the house and then she'd have to sue me for
her 1% (and possibly any other damages by not giving her the option to
buy out my share first). If it were registered then I wouldn't be able
to sell the house without her consent rather than currently I'm not
allowed to.

Is there a difference if it's a purchase rather than a gift?

Tim.

 

[Ronald Raygun]

No that most certainly won't do. The transfer has to be properly
conveyenced, stamped and registered, with all duties and fees, as
appropriate, paid.

No, I don't think that is the case. It would be if the intention were
to transfer legal title, but that is not necessarily what is being
proposed here. For CGT/IHT purposes, a mere transfer of beneficial
interest, *without* a conveyance, ought to suffice.

 

[tim \(not at home\)]

No, I don't think that is the case. It would be if the intention were
to transfer legal title, but that is not necessarily what is being
proposed here. For CGT/IHT purposes, a mere transfer of beneficial
interest, *without* a conveyance, ought to suffice.

I'm afraid the we end up with a pantomime script but I don't think it will.

You're not transferring the right to rental income here (which I believe can
be transferred as you describe), but the actual value in the property. I
fail to see how you can effectively transfer the value for CGT
crystallisation purposes, without actually transferring the property.

tim
value

 

[Ronald Raygun]

I'm afraid the we end up with a pantomime script but I don't think it
will.

You're not transferring the right to rental income here (which I believe
can
be transferred as you describe), but the actual value in the property. I
fail to see how you can effectively transfer the value for CGT
crystallisation purposes, without actually transferring the property.

I think beneficial interest goes (or can go) beyond the right to benefit
from rental income, and can (perhaps even must) include the right to benefit
from capital gain.

What I'm not sure about is whether beneficial interest is indivisible or
can be split so that the right to income and the right to gain (from the
same potentially fractional holding) can be vested in different people.

I suspect it is indivisible, so that when the BI is transferred (be it
gifted or sold), without also transferring legal title, it automatically
crystallises the transferor's gain (except when the transferee is the
transferor's spouse).

The OP refers to lawyer-blessed paperwork when the initial 2% were
transferred and it would be up to him to consult this to determine whether
a share in the title or merely in the beneficial interest was transferred.
I suspect it would be the former if lawyers were involved.

There would have been no stamp duty due at the time because 2% of the value
of the property would not have been above the SD threshold. He could give
away further small stakes in the property without SD becoming payable until
such time as the cumulative value transferred breaches the threshold (under
the "sequence of transactions" rules).

I wonder (even if my opinion that right to gain goes with right to income
turns out to be mistaken) if the OP could crystallise sufficient gain for
his purposes by transferring only such fraction of the value of the
property as stops just short of the SD threshold. Further, if subsequent
transfers are in the opposite direction, would that reduce the cumulative
total?

For example, suppose the house is worth a bit over 2.5 times the lower SD
threshold and he transfers 40% of the value of the property, perhaps spread
over a few years to maximise use of the annual CGT exemption, thus bringing
the cumulative value transferred to just below the SD point. Then she
similarly transfers it all back to him. Does that wipe the slate clean or,
if he should then transfer another 40% to her, in order to crystallise a
further fraction of the gain, would he more or less immediately fall foul
of the "series of transactions" rules, or not?

 

[google]

I think beneficial interest goes (or can go) beyond the right to benefit
from rental income, and can (perhaps even must) include the right to benefit
from capital gain.

What I'm not sure about is whether beneficial interest is indivisible or
can be split so that the right to income and the right to gain (from the
same potentially fractional holding) can be vested in different people.

AIUI[1], my partner owns 1% of the property. If it is sold she will
get 1% of the proceeds. So she will be liable for any capital gains on
that 1%. She also currently gets 100% of the rental income. We wrote
to the tax office telling them about this arrangement. There doesn't
seem to be a form.
http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm

[1] This is what I asked the solicitor for. If it's not what I've done
then I don't know what I should do.

I suspect it is indivisible, so that when the BI is transferred (be it
gifted or sold), without also transferring legal title, it automatically
crystallises the transferor's gain (except when the transferee is the
transferor's spouse).

The OP refers to lawyer-blessed paperwork when the initial 2% were
transferred and it would be up to him to consult this to determine whether
a share in the title or merely in the beneficial interest was transferred.
I suspect it would be the former if lawyers were involved.

We are tenants in common. I have a deed of trust that assigned the 1%
to her.

There would have been no stamp duty due at the time because 2% of the value
of the property would not have been above the SD threshold. He could give
away further small stakes in the property without SD becoming payable until
such time as the cumulative value transferred breaches the threshold (under
the "sequence of transactions" rules).

I'm pretty sure the value of the property will be below the 1% SD
threshold even on an optimistic pricing so this isn't a concern

I wonder (even if my opinion that right to gain goes with right to income
turns out to be mistaken) if the OP could crystallise sufficient gain for
his purposes by transferring only such fraction of the value of the
property as stops just short of the SD threshold. Further, if subsequent
transfers are in the opposite direction, would that reduce the cumulative
total?

For example, suppose the house is worth a bit over 2.5 times the lower SD
threshold and he transfers 40% of the value of the property, perhaps spread
over a few years to maximise use of the annual CGT exemption, thus bringing
the cumulative value transferred to just below the SD point. Then she
similarly transfers it all back to him. Does that wipe the slate clean or,
if he should then transfer another 40% to her, in order to crystallise a
further fraction of the gain, would he more or less immediately fall foul
of the "series of transactions" rules, or not?

Don't know about the SD but I don't think you can transfer 40% back
and forward to use up all the CGT. Certainly if you tried that with
shares it would not work.

At best with CGT I'd expect that first time you'd crystallize 40% of
the gain, the second time 24% (40% of the remaining 60%) and so on.
But I'd expect that you would have to transfer the most recently
acquired proportion first. (I'm ignoring the fact that there might
also have been a smaller gain on the 40% already transferred)


I'm starting to think that this is all too complicated to save me what
will probably only amount to a few thousand pounds of tax at most and
quite possibly save me no tax at all (could even cost me if property
prices continue going up at the rate they have). If I did plan to sell
the property in the future then I already have the possibility of
gifting/selling as much as possible to my partner (inside the CGT
allowance) in one tax year and then sell it in another. Or if prices
do continue going up (which I don't expect) I could reconsider when
transferring it in chunks to use up each annual allowance makes sense
and I am definitely going to see a tax saving.

Tim.