Although I apologise for the miserable title, deathbed tax planning is never going to be a cheerful activity. It can however significantly increase the tax-efficiency of a family’s affairs. Simple planning can revolve around three fairly simple tax principles:
1. Assets can be transferred between spouses and civil partners (when I talk about spouses for the remainder of this article assume that I also mean civil partners) without triggering a capital gains tax liability. The recipient spouse simply takes on the tax history of the transferring spouse.
2. No inheritance tax (IHT) is triggered when one spouse inherits assets from another.
3. When something is inherited, then even though no IHT has been payable, the asset is uplifted to market value on death for capital gains tax purposes.
These principles when combined, can lead to some sensible ‘deathbed planning’ opportunities. HMRC even document their acceptance of this by referring to it as standard planning in their general anti abuse rules (GAAR).
Brian and Sue are married and own a £2m residential property portfolio jointly. This originally cost £500,000. If they were to sell it, they have been advised that they would be liable for capital gains tax of £420,000 (£1.5m @ 28%). Sadly, Sue has been diagnosed with a terminal illness and so (perhaps counterintuitively) Brian gifts his share in the property portfolio to Sue shortly before her death. Using the principles mentioned above, after Sue’s death, Brian will be able to sell the property portfolio for £2m without triggering a tax charge. He could then consider other IHT strategies in respect of the funds such as investing in AIM portfolios or giving the proceeds away to his children.
Forbes Dawson view
This kind of planning will often yield benefits, although tax is often the last thing on people’s minds during these sad circumstances. Perhaps the best strategy is to make couples aware of this kind of planning when giving general IHT advice. There also needs to be a level of trust involved because the transferring spouse would not want to be left destitute by the recipient spouse leaving assets to somebody else! This planning is particularly effective when the surviving spouse has every expectation of living for a long time after the first spouse’s death – because they will then have plenty of time to plan their own IHT affairs. Finally, I am sorry that this Tax Bite is not more festive!
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