Capital Gains

Newcomer1234

Please can somebody advise?
In 2000 Mr A had some spare cash and invested it in some shares. At the same time he wrote to his children saying this money was for them and that it would become theirs in equal shares on his death.
He has now died.

How do you calculate the capital gain?
As I understand it the relevant dates are;
Date of gift - 2000
Date of Death - 2018
Date of Probate 2019

I know the end date for the calculation is Probate. What I don't know is if the other number for the calculation is the amount of the initial investment or the valuation at the date of death.

Does it make a difference knowing that the dividends were reinvested and the tax on the dividends was declared by Mr A on his tax returns.


I know I could ask the tax office but would like an idea what the likely answer would be.

Thanks

AnotherJoe

I don't beleive there's any CGT to calculate. There may be IHT.

kinger101

(a) Mr A didn't gift the shares in 2000. He merely sent a letter saying he intended to do so on death. The executor/administrator of Mr A's estate had better check there's no will to the contrary, and if not, whether there might be any conflict under the rules of intestacy. Not likely to be a problem if the children are the sole beneficiaries of the estate. But if there's anyone else who might be entitled (spouse/dependents) and they might contest this, it's not a DIY job. Appoint a solicitor.

(b) the children will inherit shares at their probate value. Probate value becomes the base cost for any future CGT calculations. HMRC can collect any IHT due from the estate or beneficiaries. If the estate can't or won't pay, then HMRC will expect payment from beneficiaries.

Newcomer1234

Thanks for the replies.

The will fortunately isn't an issue -although there is no reference to the shares in the will.

There was a Financial Adviser involved at the time of the letter advising the intentions back in 2000. Said Adviser wrote after the death saying there was no need to include the shares in the IHT submission as the gift was over 7 years ago.

Was the Adviser incorrect? If the gift is only valued as of death should the shares have been included in the IHT form - it wouldn't have made IHT payable.

Sometimes simple things become unnecessarily complicated.

kinger101

I think you need to get an accountant/taxation consultant to confirm, but I very much doubt the Financial Advisor is correct.

AnotherJoe

Whose name were the shares held in? Yiu say he paid tax on the dividends which implies they were in his name.
So, I would say (I have no legal or financial qualifications!) the letter was merely letting them know of his intent for what should happen to the shares after death.
Perhaps a test would be, could one of the children, before fathers death, have sold his % of the shares and done something with the money against fathers wishes. If not, it wasn't a gift at the point of that letter, and the shares should have been included on the IHT form.
Or if each child had their name in the share register as owning that %, and could have sold at any point, then yes it was a gift. Seems unlikely because if the letter says "you can have this after i die" by definition then it's not a gift !
That's how I see it.

londoninvestor

kinger101 wrote: »

I think you need to get an accountant/taxation consultant to confirm, but I very much doubt the Financial Advisor is correct.

The only way I can reconcile the FA's statement with the facts described is if in 2000 Mr A actually created a trust (with children as beneficiaries) that would hold the shares until his death, and that's what he was explaining in his letter.

Could that be the case? (You'd expect the FA to be able to supply trust documents if so.)

As kinger101 and AnotherJoe say, if that's not the case, and Mr A continued to hold the shares in his name, then there was no gift in 2000 and it sounds like the letter was in effect saying "Just so you know, here's what to expect financially when I pass away." So there's no CGT on the gain since 2000 (because taxable capital gains are extinguished at death); and the shares would form part of the estate that should be declared on the IHT form.

Thrugelmir

Was the will drawn up later? In which case did it supercede the letter of intent.

In 2000 Mr A had some spare cash and invested it in some shares. At the same time he wrote to his children saying this money was for them and that it would become theirs in equal shares on his death.

Nothing was gifted. All his children had to outlive him in order to benefit. He appears to have invested some money with no intention of ever touching it.

Aegis

The only way the gift would be effective from the date of purchase is if the letter can be interpreted in such a way that it created a trust for his children. If so, either the trust or the children should have been paying any tax due on the income and gains for the shares since then, so an acid test of whether a trust was created would be how the tax was handled for the rest of his life. If he paid the tax himself based on his own rates, the assets haven't been segregated out from his estate, which would strongly imply that no trust was established.


All in all, this is a good lesson why a trust should always be deliberately established with a deed rather than simply implied.

Newcomer1234

Sorry for the delay in replying - and thanks for your responses (PC problems!)

Financial Adviser was adamant that his advise to exclude from IHT figures was correct. But also wanted £150.00 hour for any further advice, I am in the wrong job obviously.

So, we called the tax office.
Explained,
Letter declaring gift to change hands on death.
Shares in Mr A's name.
Beneficiaries had no control over what happened to investment (presumably there was nothing to stop Mr A cashing it in)
Dividends were automatically re-invested but the Mr A took responsibility for declaring them on his tax returns.
Funds could not be released to beneficiaries without probate being provided.

And the Taxman said.....Its a gift, more than 7 years old. Not to be included on IHT form. Pay Capital gains, the starting point to be the amount initially invested, the end point to be the cash that was eventually received.

It makes no sense to me

So, hmm methinks. If I have some spare cash to invest, I can invest it and write a letter to say its to go to my kids on death and treat it like its mine in the meantime. (I now know that Mr A did not tell his children, they just found the letter in his things when clearing up, I guess they would have got the money one way or another.) So, if I change my mind and need the money in the meantime I just scrap my letter.