Tax consequences of spousal transfers
benjaminfabi
Moderator
Hi.
Mr A has gains in his GIA portfolio, has no remaining CGT AEA, and is a higher rate taxpayer. He gives £10k to Mrs A, who has her full AEA. She sells the assets and then gives the proceeds back to her husband for him to fund his ISA.
What are the tax consequences?
I would like to hear any variation on the following:
- The transfer does not satisfy the requirements set out in HS281, as the beneficial ownership of the asset never really transferred from Mr A to Mrs A i.e. it was artificial for the purposes of tax reduction.
- As such, Mr A has the CGT liability on the sale of the assets.
- Quite separate to the above, the initial transfer from Mr A to Mrs A is a conditional gift, which doesn't pass the test for being an exempt transfer to a spouse, and is therefore a PET.
- This effectively reduces Mr A's available NRB for 7 years. If he dies in this period, it permanently captures a £10k loss to the transferable NRB available to Mrs A.
- The subsequent transfer back to Mr A... I don't know?
Benjamin Fabi
Comments
I hope tax counsel read the big tent...
In the meantime have a swizz at D19 which suggest an alternate analysis may be achievable
https://assets.publishing.service.gov.uk/media/5f5a2734d3bf7f723c19cab3/gaar-part-d-2017.pdf
My guess
I suspect the CGT analysis is incorrect - there's no settlement rule for CGT and can't find any references to beneficial ownership being a factor.
You may well be correct on the IHT part!
HS281 states:
You’re chargeable to Capital Gains Tax if you dispose of an asset held in your name, unless you’re holding it on behalf of another person, such as your spouse or civil partner. If you’re holding an asset on behalf of your spouse or civil partner, your spouse or civil partner is commonly known as the beneficial owner and will pay tax if a gain is made from its disposal.
To decide which of you should return any gain and pay any tax, you should consider:
• whether you and your spouse or civil partner have made a formal declaration about beneficial ownership using Form 17, ‘Declaration of beneficial interests in joint property and income’.
• who provided the cost price and whether the asset was bought as a gift for your spouse or civil partner
• who received the proceeds of the disposal
My argument (if I was HMRC) would be that simply transferring from husband to wife for the avoidance of CGT doesn't transfer the beneficial ownership.
Although I do note the CGT example in the pdf you linked. The key question would therefore be: Do the means of achieving the substantive tax results involve one or more contrived or abnormal steps?
There is no special definition for contrived or abnormal, so you could see an argument where HMRC see this scenario as artificial within GAAR.
I get it - there's just no mention of beneficial ownership moving anywhere in the CGT tax code.
And why I hoped tax counsel was reading! A definitive answer is not available.
No, as is often the case.
This falls under GAAR for me.
@SA96 thanks, I tend to agree. Problem with GAAR is that it really isn't a simple test, and it comes down to whether it's abusive and this devilish 'double reasonableness' test.
For me, it's not worth the risk to save a few hundred quid in tax when you're talking about 6-figure wealth.
Hi all,
A quick question related to this. We have a situation where a client of ours (Mrs A) has a large GIA with pregnant gains. Her spouse (Mr A) has recently been diagnosed with dementia and as such his decision making capacity may be impaired.
Clearly we don't know when Mr A will die, but hypothetically, if it got to a stage where it was clear that he would die first, and Mrs A had power of attorney, do we think gifting the GIA to Mr A to wash out gains prior to death would fall under GAAR?
The GAAR guidance in the link above suggests this is acceptable, but the mental capacity issue is perhaps the key here. My instinct is to say that if he already has a valid will which gifts the asset back to Mrs A on death, then this is acceptable. The gift is fine as the donor has full mental capacity.
What do we think?
It sounds like the sort of thing that wouldn't be okay, but the GAAR guidance said this was acceptable, which is odd but there you go...
GAAR says all OK.
Thanks both. That was my understanding but the fact that the donee may not have mental capacity is what made me pause.
I think that's a problem for the gifting as opposed to the receiving.
Thanks Les. Yes, it was more whether you can be considered the beneficial owner of an asset if you don't have the mental capacity to to fully understand it and make decisions of your own free will, and it isn't likely to be used for your benefit (care, for example). There is a line in D19 about Mrs Jones (the receiver) having full mental capacity, but it doesn't then expand on that.
I'll do a bit more digging, but in the absence of any more guidance from HMRC or any other precedents, I think any advice we give would have to come attached with a very large risk warning.
Yes, best be cautious - I can't think why the capacity point is relevant.