Mark McLaughlin looks at a ‘deathbed’ tax planning step for spouses or civil partners.
Inheritance tax (IHT) has been labelled by some as a tax on death. However, IHT has also been referred to as a voluntary tax, as steps can often be taken during an individual’s lifetime to reduce the IHT burden on their death.
In addition, forward planning can sometimes reduce capital gains tax (CGT) in advance of an individual’s death.
Accelerating gifts
For example, married couples (or civil partners) can achieve CGT savings by making gifts between themselves, particularly in unfortunate circumstances where the life expectancy of one spouse is shorter than the other.
The gift of an asset (e.g., investment property) between connected persons is normally treated as a disposal at market value for CGT purposes. However, gifts between spouses living together are generally treated as being made on a ‘no gain, no loss’ basis.
On death, a deceased individual’s assets are generally treated as acquired by their personal representatives at market value; in effect, there is a CGT-free uplift in the value of the asset on death. This can have beneficial overall results.
Example: Keep it in the family
Andrew and Bethany are married, and are UK resident and domiciled. Unfortunately, Bethany has recently been diagnosed with a terminal illness, and her life expectancy is less than a year. Andrew owns an investment property in London, which is standing at a significant capital gain. He transfers the property to Bethany. Under the terms of her will made several years ago, Bethany’s estate passes on death to Andrew. Sadly, Bethany died nine months later, leaving her entire estate (including the London property) to Andrew.
The lifetime gift of the investment property from Bethany to Andrew was free of CGT. Andrew received the property back on Bethany’s death, uplifted to market value.
Andrew might consider selling the property shortly afterwards, with little or no CGT to pay (NB for IHT purposes, transfers between UK domiciled spouses (or civil partners) are exempt; hence Andrew’s investment property was gifted to Bethany, and Bethany’s estate (including the London property) passed to Andrew, without an IHT charge on each occasion).
‘Dodgy’ planning?
When undertaking tax planning, it is generally prudent to consider how HM Revenue and Customs (HMRC) might perceive it; is the planning likely to be accepted, or is it susceptible to challenge? For example, a general anti-abuse rule (GAAR) is aimed at counteracting ‘abusive’ tax arrangements. If the GAAR applies to an abusive arrangement, the tax advantage is broadly counteracted by adjustment on a ‘just and reasonable’ basis. Furthermore, a penalty of 60% can be imposed.
Could HMRC challenge the above ‘deathbed’ tax planning as being abusive? HMRC’s guidance on the GAAR (tinyurl.com/GAAR-PartD) includes an example (at D19) illustrating ‘standard’ tax planning along similar lines to the above example (i.e., a CGT arrangement involving a gift of shares between spouses, followed by the death of the recipient spouse several months later). It concludes that the GAAR would not apply.
Of course, the fact that an arrangement is not ‘caught’ by the GAAR does not mean that it has HMRC’s ‘blessing’; it may still be challenged in an HMRC enquiry.
Practical tip
Don’t forget to consider all relevant taxes in planning arrangements. For example, the gift of an investment property by Andrew in the above example could result in a stamp duty land tax liability if an outstanding mortgage existed on the property, which was taken over by Bethany.
