IHT and CGT

[stuart noble]

In calculating IHT on an estste The Revenue have just agreed the value of a
house as of Sept 03 based on the district valuer's estimate. The house was
actually sold in May 04 for £50K over this figure, and they have asked
whether we wish to accept the lower figure for IHT purposes. Er, well, yes
but have I missed something?
Presumably a capital gain will then arise on the £50K but, for a standard
rate taxpayer, I am assuming there will be less tax than the straight 40%
IHT. What we plan to do is draw up a deed of variation to split the house 4
ways (2 sons, 2 daughters-in-law) so that 4 CGT allowances get used. Does
this sound like a reasonable course of action? There's also a 2 year old
grand-daughter. Maybe there's a way to utilise her allowance as well?
Any advice appreciated.

 

[Doug Ramage]

In calculating IHT on an estste The Revenue have just agreed the value of a
house as of Sept 03 based on the district valuer's estimate. The house was
actually sold in May 04 for £50K over this figure, and they have asked
whether we wish to accept the lower figure for IHT purposes. Er, well, yes
but have I missed something?
Presumably a capital gain will then arise on the £50K but, for a standard
rate taxpayer, I am assuming there will be less tax than the straight 40%
IHT. What we plan to do is draw up a deed of variation to split the house 4
ways (2 sons, 2 daughters-in-law) so that 4 CGT allowances get used. Does
this sound like a reasonable course of action? There's also a 2 year old
grand-daughter. Maybe there's a way to utilise her allowance as well?
Any advice appreciated.

I assume that this not merely a mechanism to generate more CGT allowances,
and the new beneficiaries get to retain their share of the sale proceeds?

 

[stuart noble]

I assume that this not merely a mechanism to generate more CGT allowances,
and the new beneficiaries get to retain their share of the sale proceeds?

They will retain their share but presumably it is up to them if they want to
put it into a joint venture, such as buying a house.

 

[Doug Ramage]

They will retain their share but presumably it is up to them if they want to
put it into a joint venture, such as buying a house.

As you can probably see, this is a rather difficult area. I, personally,
would not attempt such a series of transactions - too likely to invite an IR
investigation. As RR has posted elsewhere, it is likely to end in tears.

There is the added complication of involving a minor - presumably someone
will have to act as her "trustee" which can be even more restricting.

 

[Ronald Raygun]

In calculating IHT on an estste The Revenue have just agreed the value of
a house as of Sept 03 based on the district valuer's estimate. The house
was actually sold in May 04 for £50K over this figure, and they have asked
whether we wish to accept the lower figure for IHT purposes. Er, well, yes
but have I missed something?

Presumably a capital gain will then arise on the £50K but, for a standard
rate taxpayer, I am assuming there will be less tax than the straight 40%
IHT.

Presumably they don't know your circumstances, and you haven't told us how
much the estate is worth. If, including house at lower figure, it is below
IHT threshold, but would be above it if the higher figure is used, then only
part, not all, of the extra £50k would be taxed at 40%. Likewise, for all
they know, it might be that the beneficiary is a higher rate taxpayer
already, in which case most of the £50k would then be taxed at 40%.

In other words, there do exist cases, and they're probably in the majority,
where less tax is paid if the IHT valuation is higher. They were only
trying to be helpful.

What we plan to do is draw up a deed of variation to split the house
4 ways (2 sons, 2 daughters-in-law) so that 4 CGT allowances get used.
Does this sound like a reasonable course of action?

Yes, but how is the split at present, without a variation? If it just
goes to the two sons, there is no point in making a variation to bring
in the daughters-in-law, assuming they are in fact married to the sons,
since the sons can transfer half their interest to their wives without
it counting as a realisation for CGT purposes. That is to say, you'd
get the 4 CGT allowances anyway, even without a DoV.

There's also a 2 year
old grand-daughter. Maybe there's a way to utilise her allowance as well?
Any advice appreciated.

As Doug said, it could get unpleasantly complicated. Don't be so
greedy. With 4 CGT allowances already, only £17,200 of the gain is
chargeable. If all 4 beneficiaries are standard rate taxpayers,
they're only paying £860 in CGT off an extra benefit of £12,500.
That's really not too bad at all.

Don't forget that the costs incurred in selling the house come off the
gain. So if the estate agent's bill comes to, say, £10k [it'll probably
be less, but I've exaggerated for effect], the gain is only £40k, so only
£7,200 is taxable, and each beneficiary's CGT bill goes down to £360.

If I may be sexist for a moment, then if the wives are non-taxpayers as a
result of being "in their place" [loud wails from the gallery], the total
CGT bill is only £360 per couple. I hate to think what the accountant's
bill would be for setting up a trust for the grand-daughter. It'd probably
eat up most of that.

 

[stuart noble]

Ronald Raygun wrote in message ...

Presumably they don't know your circumstances, and you haven't told us how
much the estate is worth.

Well over the threshold, and they know the circumstances only too well.

Yes, but how is the split at present, without a variation?

There isn't a split in the will. Everything goes from father to daughter, so
the variation passes it to her sons instead. As I see it this avoids the 7
year rule if she were to pop off prematurely.

If it just
goes to the two sons, there is no point in making a variation to bring
in the daughters-in-law, assuming they are in fact married to the sons,
since the sons can transfer half their interest to their wives without
it counting as a realisation for CGT purposes. That is to say, you'd
get the 4 CGT allowances anyway, even without a DoV.

Ah! So would putting the money into their joint account be considered as
transferring half of it to the wife?

As Doug said, it could get unpleasantly complicated. Don't be so
greedy.

Why ever not? Isn't that the game? They screw every penny out of you and you
try to screw some back. They can only say no.

With 4 CGT allowances already, only £17,200 of the gain is
chargeable. If all 4 beneficiaries are standard rate taxpayers,
they're only paying £860 in CGT off an extra benefit of £12,500.
That's really not too bad at all.

Better than 40% on the lot I agree, but not quite good enough

Don't forget that the costs incurred in selling the house come off the
gain.

Yes, that had ocurred to me. Agents fees, clearing the place, and anything
else I can think of.

I hate to think what the accountant's
bill would be for setting up a trust for the grand-daughter. It'd probably
eat up most of that.

As I see it, if the 2 year old beast has her own bank account, then
presumably there is some kind of unwritten trust in operation anyway with
the mother acting on the child's behalf. If The Revenue gives children a
capital gains allowance, presumably they expect them to use it.
Thanks for your response. I thought this one was dead

 

[Ronald Raygun]

Ronald Raygun wrote in message ...

There isn't a split in the will. Everything goes from father to daughter,
so the variation passes it to her sons instead.

Ah, you didn't mention the daughter before. So the sons are really
grandsons, and the grand-daughter a great-grand-duaghter (of the deceased).

As I see it this avoids
the 7 year rule if she were to pop off prematurely.

Yes, good idea, assuming she's well enough provided for already.

Ah! So would putting the money into their joint account be considered as
transferring half of it to the wife?

What money? The sale proceeds? Not quite good enough. A (quarter)
share of the house needs to be transferred to each wife *before* the
house is sold if you want to use the wives' CGT allowance. Where the
money goes after that is irrelevant.

But you don't need to do a full-blown transfer of paper ownership,
you merely need to transfer beneficial interest, which can be done
by informal declaration.

 

[stuart noble]

Ah, you didn't mention the daughter before. So the sons are really
grandsons, and the grand-daughter a great-grand-daughter (of the deceased).

That's it. And, for my sins, I am the ex-husband of said daughter in case
you wondered

A (quarter)
share of the house needs to be transferred to each wife *before* the
house is sold if you want to use the wives' CGT allowance.

So, as the house has already been sold by the daughter, the only way to get
4 CGT allowances is to split it 4 ways by DOV? If we split it 2 ways the
sons cannot use their wives' CGT allowance?

 

[Doug Ramage]

Ah, you didn't mention the daughter before. So the sons are really
grandsons, and the grand-daughter a great-grand-duaghter (of the deceased).

Yes, good idea, assuming she's well enough provided for already.


What money? The sale proceeds? Not quite good enough. A (quarter)
share of the house needs to be transferred to each wife *before* the
house is sold if you want to use the wives' CGT allowance. Where the
money goes after that is irrelevant.

Unless the monies arrive back in (say) a single individual's bank account.

But you don't need to do a full-blown transfer of paper ownership,
you merely need to transfer beneficial interest, which can be done
by informal declaration.

True. But I always recommend that an Oral Declaration of Trust be evidenced
by a written memorandum and lodged with the family solicitor. Not solely for
tax purposes, but to avoid legal dispute if the new beneficiary(s) differ
from the testamentary ones. And to confirm that the intended objective has
been achieved.

 

[Ronald Raygun]

That's it. And, for my sins, I am the ex-husband of said daughter in case
you wondered

And quite possibly even the father of the grandsons, looking after
their best interests? Jolly good.

So, as the house has already been sold by the daughter, the only way to
get 4 CGT allowances is to split it 4 ways by DOV? If we split it 2 ways
the sons cannot use their wives' CGT allowance?

I guess so. Certainly if a DOV is necessary anyway, it shouldn't be
any more trouble to make it go 4 ways than 2. The question remains,
though, that as the gain has been realised already, whether its
taxation can be retrospectively reversed by the DOV, and the fiction
assumed that the daughter was in fact selling it on behalf of the 4,
and not on her own behalf. Wait a minute! She could have sold partly
on her own behalf too, this is where a 5th allowance could come from,
have the DOV create a 5-way split (daughter, grandsons and their wives)
or, if you really must, 6 ways (by adding in the greatgranddaughter).
Daughter could subsequently gift her share of the proceeds to the rest
of the clan.

This is where you would gamble. If you include the daughter in a
5 way split, you gain an extra CGT exemption, but risk the gift
becoming liable for IHT. If you exclude her, you eliminate the
IHT risk, but certainly lose the CGT allowance.

I hope the fact it's already been sold doesn't block the possibility
of getting a DOV. That would be really embarrassing and would mean
that you'd not only be limited to one CGT allowance (the daughter's)
but also that the entire sale proceeds, if she gifts them to the clan,
become at risk of IHT upon her death.

 

[Ronald Raygun]

Unless the monies arrive back in (say) a single individual's bank
account.

Does that really matter? Who's to say that money in one person's
account isn't in part beneficially someone else's?

 

[Doug Ramage]

Does that really matter? Who's to say that money in one person's
account isn't in part beneficially someone else's?

I believe it does. Why run the risk/hassle of having to demonstrate some
other individual's beneficial interest?

I had this very problem with the IR a few years ago when a new client came
to me because the IR had launched an enquiry into her deposit account
interest.

 

[Doug Ramage]

stuart noble wrote:

I hope the fact it's already been sold doesn't block the possibility
of getting a DOV. That would be really embarrassing and would mean
that you'd not only be limited to one CGT allowance (the daughter's)
but also that the entire sale proceeds, if she gifts them to the clan,
become at risk of IHT upon her death.

A DOV can still be executed even though the asset has been sold by the
original beneficiary.

 

[stuart noble]

Ronald Raygun wrote in message ...

And quite possibly even the father of the grandsons, looking after
their best interests? Jolly good.

Yep. Maybe they'll take pity on me when I'm old and feeble (as opposed to
just feeble)

The question remains,
though, that as the gain has been realised already, whether its
taxation can be retrospectively reversed by the DOV, and the fiction
assumed that the daughter was in fact selling it on behalf of the 4,
and not on her own behalf.

Sounds like Doug has answered that. It wouldn't be a very logical system
otherwise.

Wait a minute! She could have sold partly
on her own behalf too, this is where a 5th allowance could come from,
have the DOV create a 5-way split (daughter, grandsons and their wives)
or, if you really must, 6 ways (by adding in the greatgranddaughter).
Daughter could subsequently gift her share of the proceeds to the rest
of the clan.

The greatgranddaughter if it's not too complicated. We're going to see what
the implications are of a bank account in her name and what powers the
mother would have. I'm sure that must constitute a trust of some kind, and a
free one at that.

This is where you would gamble. If you include the daughter in a
5 way split, you gain an extra CGT exemption, but risk the gift
becoming liable for IHT. If you exclude her, you eliminate the
HT risk, but certainly lose the CGT allowance.

I suppose life assurance would cover that possibility. Interesting that this
type of policy seems to reduce over the 7 year period, whereas someone on
here was explaining why the whole sum had to be covered for the full period.
There's also the option of using MY allowance but ex wife's eyes glaze over
at this point
Thanks for your interest.