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Capital gains uplift on death
I have read into this and it seems perfectly legit, albeit too good to be true. There are multiple online articles from wealth advisors about it. It even has a name; "the capital gains tax uplift/ reset on death"
Comments
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I will leave the issue of whether HMRC would consider this a contrivance to avoid CGT to others, but could you elaborate a bit on how the plan to reduce IHT liability would work after your father’s death.
Putting everything in your father’s name presumable means she intends to give over 50% of the portfolio away as soon as she inherits it or sells up and distributes much of the proceeds, is that correct? Do your parents depend on the rental income?0 -
Weren't these concerns raised with your professional advisors? Did they provide any caveats to their advice?Costcohacker said:Question is... it this tax evasion or legal smart tax avoidance? Does anyone have experience of this and was there lots of fallout during probate process? Did HMRC bat an eyelid?0 -
Yes, and it all sounded to go to be true. I did some research and it seemed legit. I came across this piece that explains the rationale and the tax "loopholes" involved. I just wanted to know if anyone else has been through and run into issues with HMRCHoenir said:
Weren't these concerns raised with your professional advisors? Did they provide any caveats to their advice?Costcohacker said:Question is... it this tax evasion or legal smart tax avoidance? Does anyone have experience of this and was there lots of fallout during probate process? Did HMRC bat an eyelid?But, as far as Capital Gains Tax (CGT) is concerned, death can actually provide the means to save tax.
Why Is This?
When assets pass to another person on death, they may or may not be subject to Inheritance Tax but they are generally exempt from CGT. Furthermore, not only are they exempt, but the new owner is treated as if they had acquired the asset at its market value at the date of death. This is what we call the CGT uplift on death and, under the right circumstances, it can provide a major tax-saving opportunity.What are the ‘right circumstances’? Well, the best tax-saving opportunities arise when a member of a married couple or civil partnership dies holding assets such as investment property or stock market investments. These assets will generally attract CGT at 28% on a sale or lifetime transfer, or Inheritance Tax at 40% on death, but can usually be passed to a surviving spouse free of both taxes.
Example
Tony and Janet are a married couple and joint owners of a portfolio of investment properties worth £1m. The properties were purchased many years ago for a total of £200,000.Ideally, the couple would like to pass the properties to their daughter Jamie but this would give rise to CGT of £224,000. They have looked into using a trust to pass some of the properties to Jamie but this would only work for the first £650,000 worth of property (without giving rise to an immediate Inheritance Tax charge) and, even then, both of the couple would need to survive for at least seven years.
They decided against the trust route due to concerns over Tony’s health and, indeed, a little while later, his health deteriorates further and his doctors advise that he has only a short time left to live.
Tragic as this is, the family seize their opportunity and Janet transfers her share of the investment properties to Tony before he dies. These transfers are exempt from CGT because they are between spouses.
On his death, Tony leaves everything to Janet, so there is no Inheritance Tax because all the transfers benefit from the spouse exemption.
Janet is now treated for CGT purposes as if she had purchased the properties for their current market value of £1m. She can now either sell them or transfer them to Jamie but, either way, she should have no CGT to pay.
If Janet does transfer the properties to Jamie, and survives for at least seven years thereafter, there should be no Inheritance Tax on them either. In fact, some savings would begin to accrue even after just three years.
The interesting thing about this planning is that it is rather counter-intuitive. We are all used to the idea of divesting ourselves of assets as we get older in order to reduce our family’s Inheritance Tax bill. But, as we can see from the example, this family saved £224,000 by transferring assets to a dying parent.
Now that we have the transferable nil rate band for Inheritance Tax purposes, most families will have nothing to lose by using this planning method – and everything to gain!
There are a few exceptions, however. Where one or both of the couple is already a widow or widower (or surviving civil partner) from a previous marriage, there can be more benefit in transferring some assets directly to a child or other beneficiary on death. The tax-free uplift for CGT still applies, however, so transferring assets to the dying spouse before death will usually still yield savings.
Some care needs to be taken where the family is seeking to pass assets to the next generation quite soon after the first parent’s death. Where there is any type of request, no matter how informal, asking the beneficiary under a Will to transfer inherited property to another person and the beneficiary does indeed make the requested transfer within two years of the deceased’s death, the transfer is treated as a direct transfer from the deceased to that other person.
In our example above, this would mean that Inheritance Tax was payable on the properties which Tony left to Janet. It is all too easy to trigger this provision. Even if the dying Tony simply said to Janet “you will look after Jamie, won’t you”, HMRC might construe this as an informal request and apply the provision (I have no idea how they sleep at night!)
In short, what happens after the first spouse’s death has to be left entirely in the hands of the survivor. If in any doubt, the survivor could avoid the risk posed by this provision by waiting two years and a day after the deceased’s death before passing the assets on to the ultimate recipient. There are two potential drawbacks to this, however.
Firstly, the second spouse would then need to outlive the first by at least nine years for the properties to pass completely free of Inheritance Tax. Even so, there will be cases where the survivor’s life expectancy is long enough to mean that this is not a massive concern and this risk can also be covered through term assurance.
Secondly, the widow or widower would be exposed to CGT on any growth in the value of the properties between the date of the deceased’s death and the date of the transfer to the ultimate recipient. This may mean that the properties cannot be passed on totally tax-free but 28% on two years’ growth is certainly a lot better than 40% on the entire value!
In most cases, however, the most difficult thing about this planning may be the fact that the action required has to be carried out at a very stressful and emotional time. Nevertheless, if the Government is hard-hearted enough to use death as an opportunity to raise taxes, why shouldn’t we use it as an opportunity to save them?
Pitfalls to Watch Out For
This type of planning will work well for some families but there are a few things to watch out for.Firstly, where the surviving spouse is non-UK domiciled for Inheritance Tax purposes, the spouse exemption for Inheritance Tax is capped at just £55,000, so this planning may not work as intended.
Remember also that the spouse exemptions for both CGT and Inheritance Tax apply to legally married couples and registered civil partners only. Furthermore, the CGT exemption for transfers between spouses does not apply where the couple have separated before the beginning of the tax year in which the transfer takes place.
Any mortgages or other borrowings over the properties transferred can lead to Stamp Duty Land Tax liabilities, or even mean that the transfers cannot take place (we all know how co-operative banks are these days!)
But, most of all, the survivor needs to be sure that the transferred properties will indeed come back to them when their spouse dies. There cannot be any arrangement which guarantees this or the planning would not work: it has to be left to the dying spouse’s Will.
So, before undertaking this inheritance tax planning, the healthy spouse should ask themselves whether there is any risk that the dying spouse might leave the properties to some mysterious third party, or even just to the local cat and dog home. These things do happen and, whilst the law provides some protection to bereaved dependents, it will seldom extend to investment properties!
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Keep_pedalling said:I will leave the issue of whether HMRC would consider this a contrivance to avoid CGT to others, but could you elaborate a bit on how the plan to reduce IHT liability would work after your father’s death.
Putting everything in your father’s name presumable means she intends to give over 50% of the portfolio away as soon as she inherits it or sells up and distributes much of the proceeds, is that correct? Do your parents depend on the rental income?
The issue at the moment is these assets can not be sold or gifted without incurring an eye-watering CGT bill, which leaves us no choice but to keep as a BTL and bring in the steady passive income. eg. one flat was bought in 1990 for 20k, is now worth 300k. If my parents just decided to sell, or gift to descendents, or put into a trust, even before IHT is factored in, it will attract a hefty CGT bill.Keep_pedalling said:I will leave the issue of whether HMRC would consider this a contrivance to avoid CGT to others, but could you elaborate a bit on how the plan to reduce IHT liability would work after your father’s death.
Putting everything in your father’s name presumable means she intends to give over 50% of the portfolio away as soon as she inherits it or sells up and distributes much of the proceeds, is that correct? Do your parents depend on the rental income?
By using this advice that appears to wash away this capital gains tax by resetting the acquisition value to present day, we can then liquidate the asset and then I guess just spend it in the time mum has left. A couple of cruises, business class flights, Birkin hand bags, meals at La Gavroce enjoyed by mum and the IHT liability quickly diminishes0 -
Sounds a good plan.Costcohacker said:Keep_pedalling said:I will leave the issue of whether HMRC would consider this a contrivance to avoid CGT to others, but could you elaborate a bit on how the plan to reduce IHT liability would work after your father’s death.
Putting everything in your father’s name presumable means she intends to give over 50% of the portfolio away as soon as she inherits it or sells up and distributes much of the proceeds, is that correct? Do your parents depend on the rental income?
The issue at the moment is these assets can not be sold or gifted without incurring an eye-watering CGT bill, which leaves us no choice but to keep as a BTL and bring in the steady passive income. eg. one flat was bought in 1990 for 20k, is now worth 300k. If my parents just decided to sell, or gift to descendents, or put into a trust, even before IHT is factored in, it will attract a hefty CGT bill.Keep_pedalling said:I will leave the issue of whether HMRC would consider this a contrivance to avoid CGT to others, but could you elaborate a bit on how the plan to reduce IHT liability would work after your father’s death.
Putting everything in your father’s name presumable means she intends to give over 50% of the portfolio away as soon as she inherits it or sells up and distributes much of the proceeds, is that correct? Do your parents depend on the rental income?
By using this advice that appears to wash away this capital gains tax by resetting the acquisition value to present day, we can then liquidate the asset and then I guess just spend it in the time mum has left. A couple of cruises, business class flights, Birkin hand bags, meals at La Gavroce enjoyed by mum and the IHT liability quickly diminishes0 -
A comprehensive list. I would add the following:JamesRobinson48 said:Fascinating question and I'd love to hear some real life forumite experiences.
It strikes me that OP's plan may work fine as long as everything turns out exactly as he predicts. But as the article he quoted above explains at the end, there are substantial risks if things unexpectedly turn out different (unlikely as that might seem) or if one makes even the smallest slip in executing the plan.
I hope you're using a reputable firm of solicitors which possesses sufficient £ professional indemnity insurance to cover the amounts involved (ask them).
So a few obvious points:
* Have you thought through what would happen if Dad lives much longer than expected? Just one example: Dad would need to declare and pay income tax on all of the ongoing BTL rent that used to be Mum's income but now belongs to him.
* What happens if Dad makes a deathbed decision to change his will and leave everything to a medical charity, an estranged relative or an old friend?
* What happens if Dad turns out also to have large financial liabilities, or to be subject to third party claims of any kind, that nobody in the family knew about?
* Doubtless OP can easily prove to HMRC that Mum and Dad are legally married and with UK domicile. Both essential for the plan's effectiveness, and possible lines of HMRC attack.
Also, post the transfer of BTLs from Mum to Dad, Dad's estate for IHT purposes will be much larger than before. Will that increase the IHT charge on his death, or will Dad's estate escape IHT because all is left to Mum? - supposing Mum outlives Dad which obviously is not guaranteed.
Might Mum's gift of BTLs to Dad be construed as deprivation of assets (DoA), in terms of her future entitlement to certain benefits?
Once the BTL transfer is done, it may be problematic seeking to reverse it at a later date, given the tax rules on gifts with reservation of benefit (GWROB).
Finally, having Dad own all the BTLs at the time of his death might result in the whole lot being tied up indefinitely in an expensive and long-drawn-out probate and estate administration process. During which time all of the BTL rental income would accrue to the deceased's estate and be unavailable to Mum. So hopefully she has ample other liquid funds.
1. It would be sensible for Lasting Powers of Attorney to be in place, both financial and health.
2. It may be worthwhile investigating the use of a declaration of trust with the advisers, as it may be possible to get round the problems of all the rent becoming assessable on Dad, and the property being left to someone else. If the property is currently owned as joint tenants, Mum takes Dad's share as survivor. If owned as tenants in common, Dad's will prevails. But if Mum holds her half of a joint tenancy subject to a declaration of trust for Dad, on Dad's death it would seem to come back to Mum. It's a legal question, and it may depend on where in the UK Mm and Dad live.
3. This is not tax avoidance, and is most certainly not tax evasion, unless for example forged documents came to light after Dad's death, clearly not an issue here. Ken Dodd married his long time girlfriend on his deathbed to avoid inheritance tax.
4. Deprivation of assets is irrelevant on an estate of this size, and gifts between spouses would not fall foul of such rules, nor the gift with reservation rules.1 -
Has to be owned outright by dad. If joint tenants, then on death surviving spouse takes over whole of property, with no reset of aquisition value for CG purposes. If tenants in common, than only dad's half of the value gets an aquisition value reset.Jeremy535897 said:
2. It may be worthwhile investigating the use of a declaration of trust with the advisers, as it may be possible to get round the problems of all the rent becoming assessable on Dad, and the property being left to someone else. If the property is currently owned as joint tenants, Mum takes Dad's share as survivor. If owned as tenants in common, Dad's will prevails. But if Mum holds her half of a joint tenancy subject to a declaration of trust for Dad, on Dad's death it would seem to come back to Mum. It's a legal question, and it may depend on where in the UK Mm and Dad live.JamesRobinson48 said:Fascinating question and I'd love to hear some real life forumite experiences.
It strikes me that OP's plan may work fine as long as everything turns out exactly as he predicts. But as the article he quoted above explains at the end, there are substantial risks if things unexpectedly turn out different (unlikely as that might seem) or if one makes even the smallest slip in executing the plan.
I hope you're using a reputable firm of solicitors which possesses sufficient £ professional indemnity insurance to cover the amounts involved (ask them).
So a few obvious points:
* Have you thought through what would happen if Dad lives much longer than expected? Just one example: Dad would need to declare and pay income tax on all of the ongoing BTL rent that used to be Mum's income but now belongs to him.
* What happens if Dad makes a deathbed decision to change his will and leave everything to a medical charity, an estranged relative or an old friend?
* What happens if Dad turns out also to have large financial liabilities, or to be subject to third party claims of any kind, that nobody in the family knew about?
* Doubtless OP can easily prove to HMRC that Mum and Dad are legally married and with UK domicile. Both essential for the plan's effectiveness, and possible lines of HMRC attack.
Also, post the transfer of BTLs from Mum to Dad, Dad's estate for IHT purposes will be much larger than before. Will that increase the IHT charge on his death, or will Dad's estate escape IHT because all is left to Mum? - supposing Mum outlives Dad which obviously is not guaranteed.
Might Mum's gift of BTLs to Dad be construed as deprivation of assets (DoA), in terms of her future entitlement to certain benefits?
Once the BTL transfer is done, it may be problematic seeking to reverse it at a later date, given the tax rules on gifts with reservation of benefit (GWROB).
Finally, having Dad own all the BTLs at the time of his death might result in the whole lot being tied up indefinitely in an expensive and long-drawn-out probate and estate administration process. During which time all of the BTL rental income would accrue to the deceased's estate and be unavailable to Mum. So hopefully she has ample other liquid funds.
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This is wrong. If a property is owned by spouses as joint tenants, then on the death of the first, the survivor acquires the deceased's share at market value on the date of death, so there is an uplift in base cost on half the value. Exactly the same result as where they own the property equally as tenants in common, but in that case the will determines who gets the deceased's share, not survivorship. I recall Rebecca Benneyworth making this mistake in a presentation, and she corrected it later. My suggestion was to look at whether a declaration of trust by Mum over her half in favour of Dad would extend the uplift without actually having to transfer her half to him, but it is a legal question.Costcohacker said:
Has to be owned outright by dad. If joint tenants, then on death surviving spouse takes over whole of property, with no reset of aquisition value for CG purposes. If tenants in common, than only dad's half of the value gets an aquisition value reset.Jeremy535897 said:
2. It may be worthwhile investigating the use of a declaration of trust with the advisers, as it may be possible to get round the problems of all the rent becoming assessable on Dad, and the property being left to someone else. If the property is currently owned as joint tenants, Mum takes Dad's share as survivor. If owned as tenants in common, Dad's will prevails. But if Mum holds her half of a joint tenancy subject to a declaration of trust for Dad, on Dad's death it would seem to come back to Mum. It's a legal question, and it may depend on where in the UK Mm and Dad live.JamesRobinson48 said:Fascinating question and I'd love to hear some real life forumite experiences.
It strikes me that OP's plan may work fine as long as everything turns out exactly as he predicts. But as the article he quoted above explains at the end, there are substantial risks if things unexpectedly turn out different (unlikely as that might seem) or if one makes even the smallest slip in executing the plan.
I hope you're using a reputable firm of solicitors which possesses sufficient £ professional indemnity insurance to cover the amounts involved (ask them).
So a few obvious points:
* Have you thought through what would happen if Dad lives much longer than expected? Just one example: Dad would need to declare and pay income tax on all of the ongoing BTL rent that used to be Mum's income but now belongs to him.
* What happens if Dad makes a deathbed decision to change his will and leave everything to a medical charity, an estranged relative or an old friend?
* What happens if Dad turns out also to have large financial liabilities, or to be subject to third party claims of any kind, that nobody in the family knew about?
* Doubtless OP can easily prove to HMRC that Mum and Dad are legally married and with UK domicile. Both essential for the plan's effectiveness, and possible lines of HMRC attack.
Also, post the transfer of BTLs from Mum to Dad, Dad's estate for IHT purposes will be much larger than before. Will that increase the IHT charge on his death, or will Dad's estate escape IHT because all is left to Mum? - supposing Mum outlives Dad which obviously is not guaranteed.
Might Mum's gift of BTLs to Dad be construed as deprivation of assets (DoA), in terms of her future entitlement to certain benefits?
Once the BTL transfer is done, it may be problematic seeking to reverse it at a later date, given the tax rules on gifts with reservation of benefit (GWROB).
Finally, having Dad own all the BTLs at the time of his death might result in the whole lot being tied up indefinitely in an expensive and long-drawn-out probate and estate administration process. During which time all of the BTL rental income would accrue to the deceased's estate and be unavailable to Mum. So hopefully she has ample other liquid funds.0 -
There are two threads running on this.
Would be better in one place.
https://forums.moneysavingexpert.com/discussion/6506155/cgt-tax-uplift-on-death#latest
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[Deleted User] said:
I'm sorry about the OP's dad being likely to pass in the coming months. But I do struggle with this statement.Jeremy535897 said:.3. This is not tax avoidance
I think it is generally accepted that tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.
Is this contrived? These are unusual steps and they would seem very unlikely to be done:
- if the OP's father was in good health, or
- if it was clear that the OP's mother's CGT base costs would not change as a result of the steps.
In addition, after the OP's father has died, the OP's mother's economic position (in relation to her current share of the properties) will not have changed. But her base cost will have increased.
To me, this falls in the "contrived, artificial transactions that serve little or no purpose other than to produce this advantage" part of my definition.
Parliament definitely intended that the CGT base cost of an asset be the current market value of the person who inherited property. However, I've not seen anything to indicate that Parliament intended to offer a tax advantage by taking these kinds of steps.
So this is tax avoidance. But so what? Just because it is tax avoidance doesn't mean that there is a mechanism to counter the tax advantage. The position would be different if there was a targeted anti-avoidance rules (which there is not here).
The position would also be different if this "cannot reasonably be regarded as a reasonable course of action”. I'm not going to comment on that. But if they were not reasonable, the general anti-abuse rule can counteract the tax advantage. That will be a question for HMRC to think about and (and, then the GAAR panel and potentially the courts). I do know that HMRC (and the GAAR panel) has previously taken the view that a particular type of death-bed tax planning was abusive. But that was in a much more contrived arrangement than here.
So putting tax aside, does it matter if it is tax avoidance? The Professional Conduct in Relation to Taxation that many tax professionals are required to comply with states: "Members must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation". If a bank needs to be involved, my experience is that they will want to think about how this falls within the Code of Practice on Taxation for Banks, as well as the enablers legislation.
And just to be clear, someone marrying their long time partner on their deathbed to avoid inheritance tax would not be tax avoidance.Thank you for your kind condolances, and your input.Our advisors have directed us to this document GAAR Part D 2020 (sorry i can not share as I am new to the forum)Example D19 gives a very similar scenario, albeit in relation to stocks rather than BTL properties but I'm sure they are transferable. In GAAR's own words, they believe such steps to be a "reasonable course of action in relation to the tax provisions having regard to all the circumstances." D19.7.11
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