weird question: avoiding CGT by gifting to dying spouse


R

Robert

Here's a weird question. A and B are married and one of them owns an
asset that has enjoyed a large capital gain. The asset can be passed
one to the other without incurring CGT (since they are married) but
once it is sold the CGT will be payable - unless the one owning it
dies. There is no CGT on an asset owned at death. If the
owner/deceased leaves in their will it to their surviving spouse there
is no IHT either becuase bequests to surviving spouse are exempt.

So, for such assets, is the 'tax optimal' strategey to transfer
ownership to the one who is more likely to die and for each to leave
the asset to the other in their wills?

Is there any simple 'automated' way to do this?

I did say it was a wierd question.

Robert
 
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D

dtren

Robert said:
Here's a weird question. A and B are married and one of them owns an
asset that has enjoyed a large capital gain. The asset can be passed
one to the other without incurring CGT (since they are married) but
once it is sold the CGT will be payable - unless the one owning it
dies. There is no CGT on an asset owned at death. If the
owner/deceased leaves in their will it to their surviving spouse there
is no IHT either becuase bequests to surviving spouse are exempt.

So, for such assets, is the 'tax optimal' strategey to transfer
ownership to the one who is more likely to die and for each to leave
the asset to the other in their wills?

Is there any simple 'automated' way to do this?

I did say it was a wierd question.

Robert
It's not necessarily the tax optimal strategy, since it makes the IHT
problem on the second death that much the worse.

A solution involving nil rate band discretionary trusts (if I've got
the terminology right) is usually better if that is the case.
 
R

Ronald Raygun

Robert said:
Here's a weird question. A and B are married and one of them owns an
asset that has enjoyed a large capital gain. The asset can be passed
one to the other without incurring CGT (since they are married) but
once it is sold the CGT will be payable - unless the one owning it
dies. There is no CGT on an asset owned at death. If the
owner/deceased leaves in their will it to their surviving spouse there
is no IHT either becuase bequests to surviving spouse are exempt.

So, for such assets, is the 'tax optimal' strategey to transfer
ownership to the one who is more likely to die and for each to leave
the asset to the other in their wills?
Is this purely a theoretical exercise or do you have a particular
example in mind? What type of asset are you considering, and how
much capital gain is involved? Just roughly.

There is a string attached to the transfer between spouses by gift.
If A owns the asset and gives it to B, and B then sells it, B is
treated as having acquired it at the same time and at the same cost
as A originally acquired it, so you can't get out of CGT that way.
But A could gift a half share in the asset to B, and then if they
jointly sell it, two annual CGT exempt amounts could mitigate any
tax payable. They might even sell the asset in two instalments,
straddling a tax year boundary, and get four exempt amounts that way.

I'm not sure whether the tax-free transfer between spouses by bequest
(or alternatively by intestacy or by joint ownership) has the same
string attached. It might be that if A dies and B inherits the asset,
the asset is still treated as having been acquired at A's original
time and cost. Normally bequests to non-spouses are treated as
having been acquired by the heirs at date of death and at their market
value at time of death, and payment of IHT (if due) cancels any
pre-existing CGT liability. I'm not sure whether spousal bequests
get "double" exemption. I suspect they may well not.
Is there any simple 'automated' way to do this?
You can make an asset jointly-owned (as opposed to in shares). This
is often done with the marital home. The effect is that no will is
necessary to transfer the asset, because it is already deemed wholly
owned by both co-owners, and if one of them dies, it immediately
becomes the other's property without any reference to what the will,
if any, provides. As the asset is already wholly-owned by B, A no
longer has the power to dispose of it by will except if A or B first
explicitly severs the joint tenancy.
 
J

John Boyle

Ronald said:
There is a string attached to the transfer between spouses by gift.
If A owns the asset and gives it to B, and B then sells it, B is
treated as having acquired it at the same time and at the same cost
as A originally acquired it, so you can't get out of CGT that way.
But A could gift a half share in the asset to B, and then if they
jointly sell it, two annual CGT exempt amounts could mitigate any
tax payable. They might even sell the asset in two instalments,
straddling a tax year boundary, and get four exempt amounts that way.

I'm not sure whether the tax-free transfer between spouses by bequest
(or alternatively by intestacy or by joint ownership) has the same
string attached. It might be that if A dies and B inherits the asset,
the asset is still treated as having been acquired at A's original
time and cost.
No, B will be deemed to have acquired it at the value it was on A's
death.
Normally bequests to non-spouses are treated as
having been acquired by the heirs at date of death and at their market
value at time of death, and payment of IHT (if due) cancels any
pre-existing CGT liability. I'm not sure whether spousal bequests
get "double" exemption. I suspect they may well not.
No.
 
R

Ronald Raygun

John said:
No, B will be deemed to have acquired it at the value it was on A's
death.
OK, so there would be merit in doing what the OP suggests, provided
the object of the exercise is that the surviving spouse can sell the
asset free of CGT after the first spouse's death. If the aim is to
benefit *other* heirs, it would not generally be a good idea.
That's "No." as in "Yes they will.", is it?
 
A

Alan Frame

It's not necessarily the tax optimal strategy, since it makes the IHT
problem on the second death that much the worse.
Unless the surviving spouse enters into a civil partnership with the
recently-divorced former-spouse of the potential beneficiary.

"Hey Mum, if Dad dies before you, will you 'marry' my ex-wife? - it's
only for tax purposes" ;->

rgds, 'you wanted weird' Alan
 
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R

Robert

yes indeed, but I am assuming that B keeps the asset until they die
and A inherits the asset. There is no CGT at death (it's not, I
believe, that the IHT is offset against it as another poster implied).
A gets the asset at its value at the time of the death.

I take the point that A still has the asset and, if the aim was to pass
it to the children, then A and B have failed to use B's nil band
effectively.

To make it more concrete, suppose A and B have jointly owned a rental
property for a very long time and that it stands with a very large
paper capital appreciation. Of course, there are allowances against
CGT but this seemed a neat way of avoiding it altogether.

But is there any way to configure ownership of the house so it gifted
100% to which ever spouse dies first with the gift taking effect
shortly before the death. It can be in join ttenants with the % of
ownership changed by letter. So one (illegal) way to acheive the aim
is to have two reciprocal letters with the same date on file each
giving most of one spouse's share to the other. The appropriate letter
is 'lost' following the first death. Or (also illegal) the surviving
spouse write the letter after the death and backdates it.

Is there a simple legal way?

This is idle curioisty BTW, not a concrete case.


Robert
 
R

Ronald Raygun

Robert said:
To make it more concrete, suppose A and B have jointly owned a rental
property for a very long time and that it stands with a very large
paper capital appreciation. Of course, there are allowances against
CGT but this seemed a neat way of avoiding it altogether.

But is there any way to configure ownership of the house so it gifted
100% to which ever spouse dies first with the gift taking effect
shortly before the death. It can be in join ttenants with the % of
ownership changed by letter. So one (illegal) way to acheive the aim
is to have two reciprocal letters with the same date on file each
giving most of one spouse's share to the other. The appropriate letter
is 'lost' following the first death. Or (also illegal) the surviving
spouse write the letter after the death and backdates it.
I see what you mean. The property is jointly owned and if you did
nothing special, then for tax purposes the survivor on first death
would inherit the deceased's half of the value. If it were then
sold soon, the inherited half would have been acquired recently and
thus accrued virtually no capital gain, but the survivor would still
hold his or her original half as acquired at the original joint
acquisition date, and so half the capital gian would always be taxable.

You want to engineer it so that just before A dies, B's share is gifted
to A, so that B inherits both shares when A dies, thus being deemed to
have acquired the whole value free of CGT liability.

Neat.

The reciprocal letter scheme is obviously a dishonest and hence
illegal way of arranging this. But what you could do instead is
just to make the property wholly owned by just one of them, and
to switch ownership every now and then, i.e. whenever there has
been enough capital appreciation since last time to make it worth
while. Once the death of one is anticipated, when they become
terminally poorly, make sure that's the one who holds full ownership.

That then only leaves a problem in the case of an unexpected death,
when the "wrong one" dies. In this case the one left holding the baby
would end up being liable for tax on the whole gain rather than just
half of it. They could gamble based on the relative probabilities
of expected vs unexpected deaths.

Another way is just to embark on a programme of realising the gain
in small chunks by selling small shares in the property to willing
third parties. Suppose the gain locked into the property is ten
times the annual CGT exempt amount. Spouses A and B each own a half
share in the property and thus are burdened by 5 exemptions' worth
of gain. They each have a sibling, call them C and D.

A sells a one-tenth share in the house to C, and B sells a tenth share
to D, this was 20% of the gain is realised tax free. A week later, C
and D sell the shares to B and A respectively. The exercise is
repeated each tax year, and after 5 years the job's done. Rinse
and repeat as necessary to absorb subsequent gain.
 
R

Ronald Raygun

John said:
This would trigger a CGT bill for B.
No, it wouldn't. Interspousal gifts do not give rise to CGT bills but
carry the caveat that the gain isn't realised at the time. Remember
that A and B are married to each other. The trick in Robert's mad
scheme is that once A dies, B inherits both A's original share and B's
original share, both free of CGT and free of IHT and without being
weighed down by age-old unrealised gain. It's brilliant but for the
fact that B runs the risk that A might will both shares to his barmaid
(or to her milkman, if context requires).
 
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R

Ronald Raygun

Tim said:
I thought inter-spousal transfers did not trigger CGT?
I think our friend must have had an extremely enjoyable lunch.
Let's let him off and be happy for him.
 

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