Deathbed tax planning from HMRC!

GAAR

HMRC’s guidance on the tax general anti-abuse rules (‘GAAR’) makes interesting reading because they kindly set out certain juicy bits of tax planning that they do not think are abusive.  One such ‘tip’ involves the tax consequences of one spouse gifting an asset to the other spouse shortly before that spouse’s death. This is best illustrated by an example.

 

Example

Terry and his wife June have been married for a number of years and each spouse has a will which leaves all assets to the other spouse.  Terry owns a commercial property which he bought in the mid-eighties for £200,000 but which is now worth £2.5M.  Sadly, June has been diagnosed with a terminal illness and only has six months to live.

Without proactive tax planning Terry would continue holding the factory with a base cost for capital gains tax purposes of £200,000 and a disposal would trigger £460,000 of capital gains tax.

If, however, Terry were to gift the factory to his wife, this gift would not give rise to any capital gains tax as it would be a nil gain, nil loss transfer.  On June’s death, Terry would inherit the factory at its value of £2.5M and would have no capital gains tax liability on a later sale, assuming there has been no increase in value.

 

Commentary

This is interesting for a few reasons:

  1. This bit of tax-planning almost comes with HMRC’s blessing and demonstrates that GAAR is unlikely to be used as widely as was first thought.
  2. Although not countenanced in HMRC’s example, the capital gains tax uplift removes one of the tax barriers to Terry making a gift of the factory to his children – which would fall outside of his IHT estate after seven years.
  3. This is a reminder that very effective tax-planning can be undertaken at the saddest of times.  Tax will usually be the last thing on a couple’s mind at times like this but it may be in their interests to be reminded.

In summary, this strategy should be included on any good, sensible (non-aggressive) tax planning list.

 

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