Property tax and gifts (and also deathbed tax planning)

[UnclePhilip]

Let's say married couple A and B give a house, which they own as joint tenants free of mortgage, to their three adult children C, D and E.

Then, very soon after, C,D and E sell the house.

Would I be right in thinking that, so long as A and B survive for 7 years, there will be no IHT to pay on the gift, and no CGT to pay on the sale?

Also, if say A dies 2 years after the gift while B lives for ever, what's the IHT implication on the gift? Would it make any difference if A, who has a life-limiting health condition, gifts his joint ownership so B is sole owner before the gift is made?

Thanks,

Uncle

[genou]

Let's say married couple A and B give a house, which they own as joint tenants free of mortgage, to their three adult children C, D and E.

Then, very soon after, C,D and E sell the house.

Would I be right in thinking that, so long as A and B survive for 7 years, there will be no IHT to pay on the gift, and no CGT to pay on the sale?

Yes to both. There would be CGT chargeable on A & B, unless the property has at all times been their PPR, or was only not their PPR for the last 9 months of ownership; or if lettings relief covers the gain on disposal.

Also, if say A dies 2 years after the gift while B lives for ever, what's the IHT implication on the gift? Would it make any difference if A, who has a life-limiting health condition, gifts his joint ownership so B is sole owner before the gift is made?

Thanks,

Uncle

Without the gift from A to B, on his death, half the value of the house would move from being a PET to be a chargeable transfer. You'd then need to know the size and destination of his remaining estate to work out the IHT implications. With an A->B gift, the whole transfer to the children is a PET by B, and would be unaffected by A's demise.

[helfordpirate]

The gift of an asset i.e. the house, is considered a disposal for CGT purposes. So when A and B give the property to C,D and E it is a disposal and CGT may be due on the difference between its market value and the price they acquired it. As of 2020, any tax on a property disposal has to be paid 30 days after the disposal. As it was a gift, A and B may very well not have the cash available to pay the tax.

Some reliefs may be available. If the property is or has been A and B's main residence then Private Residence Relief might be available. Normal CGT allowance is of course available. The acquisition cost for C,D and E is the market value at the time of gift. When they sell it, CGT is due on the difference between sale price and acquisition price. Again, if it is their de facto or nominated main residence then PRR may be available.

The gift will be a PET provided there is no Reservation of Benefit i.e. A and B cannot continue to gain benefit from the property. They certainly cannot live in it - there are even restrictions on how many weeks in the year they can stay or visit it.

If it is likely that A will not live 7 years and the gift was a joint gift then it probably would make sense for A to gift it to B first. This depends on its value, the residence nil rate band, whether it is main property, how much IHT allowance is available etc. etc.

[UnclePhilip]

Ah....

OK, so let's say the property was an investment property that had always been rented out.

I'd hoped that it could still be a PET. No??

Uncle

[Lootman]

OK, so let's say the property was an investment property that had always been rented out.

I'd hoped that it could still be a PET. No??

It was answered. It is a PET if A gives his half to his wife before the transfer to the kids. Otherwise 50% of the value of that property would be subject to IHT on A's estate if he dies shortly after the gift.

Since the property was not the PPR of A and B, there is no exemption from CGT on the transfer. Only transfers between spouses escape CGT. There may be some lettings relief.

[Gengulphus]

OK, so let's say the property was an investment property that had always been rented out.

I'd hoped that it could still be a PET. No??

It was answered. It is a PET if A gives his half to his wife before the transfer to the kids. Otherwise 50% of the value of that property would be subject to IHT on A's estate if he dies shortly after the gift.

Since the property was not the PPR of A and B, there is no exemption from CGT on the transfer. Only transfers between spouses escape CGT. There may be some lettings relief.

Lettings relief depends on the property having been the owner's PPR at some point during their period of ownership, and UnclePhilip says it "was an investment property that had always been rented out". So lettings relief seems very unlikely - though just possible if he only actually means that it's always been the case that at least part of it has been rented out.

What I am wondering is why there is what advantage there is (if any) to the property being given to the children, given that a quick sale of the property is being planned. After getting to the position of having ownership suitably split between A and B, selling the property and giving the children the proceeds seems likely to me to involve less paperwork, hassle and expense (due e.g. to only involving one bit of conveyancing) than giving the property to the children. And if having the cash to pay the CGT is an issue, it's automatically solved if A and B do the sale: they just hold back enough of the sale proceeds to pay it. The one possible advantage I do see is that if A's death is imminent, it may make it possible to guarantee getting the gift to the children made before his death, whereas a quick sale might not be quick enough. But if A giving B his interest in the house is part of the solution, that's the only step that needs to be done before his death, so that that possible advantage disappears...

One other observation is that if starting with A giving his interest in the property to B is advantageous on IHT, as seems likely, it might nevertheless be better not to give 100% of his interest in the property to B. The reason why not is that if B has a 100% interest in the property when the transaction that causes CGT to be due occurs, only B's CGT allowance can be used against the gain. So A retaining enough of an interest in the property to realise a gain that makes use of his CGT allowance might be beneficial overall. Doing that would presumably involve severing the joint tenancy followed by A giving part of his interest in the house to B. (I will stress though that whether this is beneficial will depend on other CGT and IHT circumstances, so needs to be worked out in the light of those circumstances, and also that I've very little experience of such matters, so this is just an idea I'm throwing into the mix!)

Gengulphus

[Lootman]

OK, so let's say the property was an investment property that had always been rented out.

I'd hoped that it could still be a PET. No??

It was answered. It is a PET if A gives his half to his wife before the transfer to the kids. Otherwise 50% of the value of that property would be subject to IHT on A's estate if he dies shortly after the gift.

Since the property was not the PPR of A and B, there is no exemption from CGT on the transfer. Only transfers between spouses escape CGT. There may be some lettings relief.

Lettings relief depends on the property having been the owner's PPR at some point during their period of ownership, and UnclePhilip says it "was an investment property that had always been rented out". So lettings relief seems very unlikely - though just possible if he only actually means that it's always been the case that at least part of it has been rented out.

What I am wondering is why there is what advantage there is (if any) to the property being given to the children, given that a quick sale of the property is being planned. After getting to the position of having ownership suitably split between A and B, selling the property and giving the children the proceeds seems likely to me to involve less paperwork, hassle and expense (due e.g. to only involving one bit of conveyancing) than giving the property to the children. And if having the cash to pay the CGT is an issue, it's automatically solved if A and B do the sale: they just hold back enough of the sale proceeds to pay it. The one possible advantage I do see is that if A's death is imminent, it may make it possible to guarantee getting the gift to the children made before his death, whereas a quick sale might not be quick enough. But if A giving B his interest in the house is part of the solution, that's the only step that needs to be done before his death, so that that possible advantage disappears...

Another benefit to doing a sale and then a gift, rather than the other way around, is that an allegation of a benefit being reserved is much more likely to happen with a real asset than it is with a gift of cash. It is actually quite hard to see how HMRC could ever try and claim that A and B reserved a benefit from a cash gift. I suppose it is possible if the children used the cash to buy a cottage and then A and B lived in it. Or if A and B ran out of funds and the kids gave them cash, possibly.

In reality when you give cash to someone, it becomes co-mingled with their other cash, and the paper trail goes cold, or at least messy. Cash is fungible in way that most other assets are not.

Fair point on the letting relief by the way.

[UnclePhilip]

Thanks to all for responses, appreciated

Uncle

[Charlottesquare]

If you want to really tax plan it with deathbed tax planning, the spouse with longer life expectancy transfers her share to the spouse with limited expected life, on his death the latent CGT bill is no more, the spouse who dies leaves the property to his/her wife/husband who then either sells or gifts to children using the new uplifted CGT base cost.

[Lootman]

If you want to really tax plan it with deathbed tax planning, the spouse with longer life expectancy transfers her share to the spouse with limited expected life, on his death the latent CGT bill is no more, the spouse who dies leaves the property to his/her wife/husband who then either sells or gifts to children using the new uplifted CGT base cost.

Very clever. Presumably the same strategy would work with other assets with pregnant capital gains e.g. a taxable share portfolio.

My wife is 13 years younger then me and so statistically might expect to live for 15+ more years than me. I am in good health but I could see a point in the future when something like this might be beneficial, assuming that our situation or the rules do not change before then of course.

And for the millions of couples in the UK who apparently choose to live together and have children, but not marry, a well-timed marriage in old age could be excellent tax planning.

[Charlottesquare]

If you want to really tax plan it with deathbed tax planning, the spouse with longer life expectancy transfers her share to the spouse with limited expected life, on his death the latent CGT bill is no more, the spouse who dies leaves the property to his/her wife/husband who then either sells or gifts to children using the new uplifted CGT base cost.

Very clever. Presumably the same strategy would work with other assets with pregnant capital gains e.g. a taxable share portfolio.

My wife is 13 years younger then me and so statistically might expect to live for 15+ more years than me. I am in good health but I could see a point in the future when something like this might be beneficial, assuming that our situation or the rules do not change before then of course.

And for the millions of couples in the UK who apparently choose to live together and have children, but not marry, a well-timed marriage in old age could be excellent tax planning.

Yes, pretty much, from a professional point of view probably not the easiest conversation to start with one's client but I have read a few tax articles about the idea.

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Edit- here is a link from 2017 indicating that the GAAR likely would not bite, albeit professional input at the point of implementation goes without saying.

https://forbesdawson.co.uk/articles/201 ... from-hmrc/

[scrumpyjack]

If you want to really tax plan it with deathbed tax planning, the spouse with longer life expectancy transfers her share to the spouse with limited expected life, on his death the latent CGT bill is no more, the spouse who dies leaves the property to his/her wife/husband who then either sells or gifts to children using the new uplifted CGT base cost.

Very clever. Presumably the same strategy would work with other assets with pregnant capital gains e.g. a taxable share portfolio.

My wife is 13 years younger then me and so statistically might expect to live for 15+ more years than me. I am in good health but I could see a point in the future when something like this might be beneficial, assuming that our situation or the rules do not change before then of course.

And for the millions of couples in the UK who apparently choose to live together and have children, but not marry, a well-timed marriage in old age could be excellent tax planning.

This is a well known strategy and was highlighted by the Office of Tax Simplification (a misnomer if ever there was one!. It should be called the Office for Stealth Tax Increases) as something that should be abolished.

[Lootman]

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Yes, I have thought a few times that, if I was not already married, that I should marry a beneficiary on my deathbed, if legal to do so.

I feel sure that has happened. I did read a case where a 20 year old woman married a 90 year old man, as that entitled her to his military pension.

But I guess we are getting a little off topic here . . .

[Charlottesquare]

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Yes, I have thought a few times that, if I was not already married, that I should marry a beneficiary on my deathbed, if legal to do so.

I feel sure that has happened. I did read a case where a 20 year old woman married a 90 year old man, as that entitled her to his military pension.

But I guess we are getting a little off topic here . . .

I concur.

[Gengulphus]

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Another catch is that HMRC might challenge the marriage as a sham, embarked upon purely to try to obtain a tax advantage... Not saying such a challenge would be successful, nor that it wouldn't, but there's clearly a risk that it would.

Gengulphus

[Lootman]

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Another catch is that HMRC might challenge the marriage as a sham, embarked upon purely to try to obtain a tax advantage... Not saying such a challenge would be successful, nor that it wouldn't, but there's clearly a risk that it would.

As for a challenge to the validity of such a marriage, my guess is that it would be on similar grounds to those used when annulling or voiding an otherwise legal marriage:

it was not consummated - you have not had sexual intercourse with the person you married since the wedding (does not apply for same sex couples)

you did not properly consent to the marriage - for example you were forced into it

the other person had a sexually transmitted disease (STD) when you got married

your spouse was pregnant by someone else when you got married

one spouse is in the process of transitioning to a different gender

https://www.gov.uk/how-to-annul-marriag ... 0into%20it

What would be harder for HMRC to do is employ some of the tricks that the immigration and social security fraud investigators do, e.g. keeping surveillance on the alleged marital home to make sure both spouses return home to it every night, or interview both parties separately and ask them questions that only a genuine couple living together would know. Tough to do when one of them is dead!

Also bear in mind that when someone dies leaving everything to their surviving spouse then often probate is not required, especially if all assets were owned jointly. So the question then arises of how HMRC would even be alerted to the situation unless someone ratted them out.

[dspp]

The neatest theoretical (never heard of it being actually done) approach re IHT and CGT, but very high risk, is to say marry one's son's fiancee on one's deathbed, she inherits your assets free of IHT on your death then marries your son, catch of course is if she does a runner post your death and does not marry him.

Yes, I have thought a few times that, if I was not already married, that I should marry a beneficiary on my deathbed, if legal to do so.

I feel sure that has happened. I did read a case where a 20 year old woman married a 90 year old man, as that entitled her to his military pension.

But I guess we are getting a little off topic here . . .

She did not draw the pension, so it was an act of choice by her to not benefit in this manner. She didn't even tell anyone about the marriage until she was very old, perhaps in her 80s. She most likely married him out of compassion, and they never cohabited.

https://www.theguardian.com/us-news/202 ... la-jackson

[scrumpyjack]

it was not consummated - you have not had sexual intercourse with the person you married since the wedding (does not apply for same sex couples)

you did not properly consent to the marriage - for example you were forced into it

the other person had a sexually transmitted disease (STD) when you got married

your spouse was pregnant by someone else when you got married

one spouse is in the process of transitioning to a different gender

Ha, Ha, yes a distant relative of mine had his marriage annulled on one of these grounds (not saying which!) many decades ago.

I should have thought the objection might be from the pension payer rather than HMRC?

I also recall many decades ago that in the partnership of which I was a partner, an elderly retired partner married a rather young filly and his large indexed linked pension was paid and funded by the partnership. The admin partner was having a fit about it, but nothing could be done. If we had had to reserve the capital liability in the partnership accounts for it on an actuarial basis, it would have been horrific. At that stage the accounts did not have to show a capital liability for retired partners pensions.

[eisman]

Genou wrote:

There would be CGT chargeable on A & B, unless the property has at all times been their PPR, or was only not their PPR for the last 9 months of ownership; or if lettings relief covers the gain on disposal.

Gengulphus later stated:

Lettings relief depends on the property having been the owner's PPR at some point during their period of ownership

Technically true, but It should be noted that lettings relief has recently changed. For disposals after 6 April 2020, lettings relief only applies where PART of the PPR is let (say, letting a room to a lodger) WHILST THE OWNER REMAINS IN OCCUPATION of the remainder of the home.

[Lootman]

I should have thought the objection might be from the pension payer rather than HMRC?

I can imagine, although these days don't pension plans have clauses in them to prevent this kind of carpetbagging? I seem to recall reading the terms of one of my pension plans which said that there are surviving spouse benefits only if the marriage was more than 10 years in existence.

As for HMRC I would think that they take a marriage certificate at face value. It is after all a binary explicit state-sanctioned legal contract. But if they were going to look into such a marriage of convenience then the wealthy 90 year old man marrying an impecunious 20 year old woman with no sign that they ever cohabited might be a giveaway.

That said, there was a case in France where a younger man married an elderly women for her wealth. She lived to something like 110 years old and, of course, he died before she did.