Crystallizing capital gains

I would imagine that HMRC have a team of experts working out ways to do this.....then blocking them.

Given that the purpose of the tax rules is to achieve public policy goals, I'd hope that they succeed, or that the underlying public policy is changed.

I'd guess part of the underlying policy here is to reward risk taking and to maintain fluidity of markets.

This would be fine in general for crystallizing the gains. However, as she does not want to get involved with running a let property it doesn't work in this case.

Ditto to the above. The IOU route seems more common when talking about discretionary trusts but I didn't find anything that would exclude it here. I did find a couple of cases reported where the summary seemed to be that HMRC should have no regards as to how the funds came to the buyer for a transaction nor what the seller used the funds for in deciding how to interpret the transaction itself for tax purposes.

Going the discretionary trust route does seem to be the only option I have. As it would be under the inheritance tax threshold and I have no other potentially exempt transfers or gifts into any other trusts to consider I believe there would be no entry fees, no 10 yearly charges nor exit charges. (This, of course, depends on the IHT thresholds remaining and the tax treatment of trusts staying the same)

The disadvantage of this is the ongoing costs of maintaining the trust. It looks like this could be anything from 300 to 1500 pounds per year. Additionally the income tax position is complicated - the trust is taxed at 50% which can then be reclaimed by the beneficiaries (based on their marginal tax rate) when the income is distributed.

So my gut feeling at the moment is to do nothing. There's a reasonable probability that the property will never be sold therefore potential CGT liabilities will never crystallize. If, in the future, we decide that we do want to sell it then it may be possible to transfer the property to my girlfriend over multiple years to take advantage of multiple CGT allowances.

Tim.

Another thought: Marry your partner and then do transfer without IHT implications.

Robert

No good. That would not crystallise the gains. The donee spouse would then be deemed to have acquired the asset at the same date the donor spouse had acquired it. So the CGT liability would then be transferred instead of neutralised.

Which does lead to a question I've never seen a satisfactory answer for.

Lets say single man owned house (PPR).

Gets married and the couple move into woman's house (PPR).

Later have kids and want to sell man's house. Wife is now at home with kids and has no income.

So they want to transfer all but 10K worth of gains to the wife so the man can use his CGT allowance but the taxable portion is taxed at the wife's 18% rate rather than the man's 28%

Does wife get PPR (and possible residential lettings relief) given that she's never lived in the house?

Tim.

No, she doesn't. Moreover, the man loses most of his PRR and LR too, because the relief is only available to be set against gains, and if nearly all of the ownership is transferred to the wife, then he would not be making any gains. Sneaky, eh? Taxman one, taxpayer nil.

To see how this would work out in practice, let's suppose that the man bought the property for 60k and lived in it for 3 years, then moved into wife;s house and rented his own house out, and they want to sell 13 years later for 160k. So the gain would be 100k over 16 years of ownership.

If the man retains 100% ownership, he'd get 3+3 years' PRR (worth 37.5k) and up to 10 years' LR (but capped at 37.5k). So there'd be a 25k taxable gain, less 10k allowance, so tax bill of 28% of 15k, £4200.

If he transfers 50% ownership to the wife, they each have 50k gain. He gets PRR+LR worth 37.5k together, so his taxable gain is 12.5k, and after the 10k allowance his tax bill is 28% of 2.5k, £700. But the wife's 50k gain gets no relief, only the 10k allowance, so her tax bill is 18% of 40k, or £7200. So this exercise would have nearly doubled their joint CGT liability.

Best option here would be to transfer only 10% of the ownership to the wife, so that she would get 10k of the gain and this would all be swallowed up by her allowance. He'd get PRR+LR of 67.5k leaving 22.5k taxable, or 12.5k after his allowance. Total tax bill £3500.

Each additional £1 worth of gain he transfers to the wife would reduce his tax bill by 7p but increase hers by 18p.

Thanks. Where/how should you go to find out things like this? I'm sure it's on the HMRC site somewhere but I have a devil of a job finding the right pages.

(Last time I had a question like this and I rang up HMRC - about whether employers pension contributions count towards the 20K that are allowed when calculating whether anti-forestalling regs apply (they don't) - I got the feeling that the person on the other end of the phone thought I ought to have just looked it up - it was obvious once I'd been pointed to the right page but despite reading probably hundreds of pages I'd never seen that particular one before)

Thanks. I think this is probably fair.

If the husband gifts to the wife - discovers that it was a mistake and the wife gifts it back before the sale, does the husband then also lose the PPR/LR? (In practice I expect they could pretend that the original gift never took place at all)

Capital gains tax does seem to be excessively complicated with strange reliefs and exceptions that aren't always rational (IMO). I actually think that LR is an "unfair" relief - I don't really understand why it exists at all if you have another PPR and if you don't and you've moved into rented accommodation and let out your main home it would seem more sensible to be able to elect to keep your main home as PPR even though you don't live in it than the fudge of LR.

So I expect that LR will go away (which I why I would have liked to crystallize my gains now).

I would actually do away with almost all the reliefs and instead allow people to make an election to use their CGT allowance to increase the effective purchase price of assets (but not allow that to trigger a loss on crystallization). This would even apply to main home and PPR would go away as well. (Maybe, by default, CGT allowance is always applied to main home unless a separate election is made to make it easy for most people)

I think this would be a reasonable brake on rampant house inflation as well. Once averate house prices start inflating at more than 10K/year then people will start triggering CGT bills on sale, especially for short term "speculators".

Tim.

Dunno. There used to be decent leaflets which were obvious to find. Then things got worse. Not sure how much it's improved. The search box on the home page sometimes gets useful hits.

Pretending may be possible, depending on just what you do to make the gift effective. Documenting it by something like changing the title deeds or writing to HMRC to tell them, would make pretending impossible. Since changing ownership between spouses doesn't change much, there is little point in gifting at any time other than immediately prior to a sale. At least that's true of the gains tax implications, though there could be an income issue, e.g. they might want to avoid the husband being taxed on rental profit.

But technically, in the scenario you describe, the husband would only lose PRR/LR *after* the date of the gift. He'd still be entitled to have his last 3 years of ownership qualify for PPR status, but it would be the 3 years prior to making the gift which would be those 3 years, since that would be when his period of ownership ends. When the wife gifts it back, then as far as the husband is concerned it would be a completely new period of ownership, in respect of which he would not be entitled to any PRR at all (and therefore to no LR either), unless he goes to live in it (with the wife, since spouses are not allowed to have different PPRs) for a bit during that new period.

He can't do anything, because it was a gift and it is now purely the wife's decision. I would think, if it was never the wife's decision, it would be a bare trust and have no effect.

Actually, more generally, you seem to be telling HMRC that your proposed arrangements aren't what they seem, and I thought HMRC worked on the intent of the arrangement, rather than the letter, so they might read a bare trust where your documents showed a discretionary one, if it was clear that you never intended there to be any discretion.

Are you using a pseudonym?

Huh? A husband and wife are planning to sell a house. To minimize capital gains tax the husband gifts part of it to the wife. They then realize that that wasn't the best ratio and the wife gifts some or all of it back. What's the problem? Of course the wife could say "actually, I'm not going to gift it back. I think we should pay more tax than we need to" but in any rational marriage it would be an obvious course of action. Likewise, the husband might gift the house to his wife when she stopped work so that the rental income used up her zero rate band. When they came to sell she might gift some of it back to use up his CGT allowance.

Read any website about CGT and the first suggestion is always to gift to your spouse in order to use their CGT allowance. Never having been married, it's not something I've really looked into but I'd have expected to at least see some warning on some of the sites if HMRC "disallowed" these transfers for CGT calculations.

I don't understand this either. I neither understand what it's trying to say nor why it fits into the current thread?

A bare trust might actually work in the original question I asked. But I don't know what additional costs a bare trust might cause. There's no point avoiding a possible (but not certain) tax bill in the future if that money is going to be spent anyway over the next decade on professional fees.

No. Why should I? Umpteen years ago when I first started letting the property and due to not fully understanding what was allowed, didn't write one letter to HMRC explaining how I was organizing my finances on the property (which I could have done but weren't "obvious" hence HMRC would need to be informed). As a result I might have paid as much as

As it happens, in this case I'm probably going to do nothing at all because the options are either sufficiently expensive that even if the CGT rules change in the worst possible way (Capital gains taxed as income and no extra CGT allowance) I still might end up being better off paying the CGT if and when it becomes due or, the ways that don't incur extra costs are sufficently unusual that HMRC might, in the future, decide to argue the toss, and I don't want that hassle.

But, whatever happens in the future, I can at least now know that I made an informed choice now what to do. I might, with hindsight, wish I'd done something different but at least I'm not going to be thinking "if only I'd known" (at least I hope I'm not going to be thinking that...)

Tim.

An example of a bare trust would be shares held in Crest, for an ordinary member of the public. The Crest member actually holds the shares, but you have beneficial ownership, and you are taxed on them.

I was suggesting that some of your trust ideas, especially given your rationales for using them, as published here, would be treated as though you still owned the property personally, for tax purposes.

Yes, some of them would. For example a discretionary trust with me as one of the beneficiaries would be a "settlor interested trust" so not only would the income be considered to be mine but it would be taxed as mine even if it went to another beneficiary with a lower rate of tax.

But that wouldn't stop the gains crystallizing. In fact, AIUI, it used to be possible to defer the gains when creating a trust like this but it's now not allowed, i.e. the rules have been recently changed so that it's now compulsory to crystallize gains in this case.

Tim.

As David Wooley has pointed out that the HMRC will continually create plugs for any invented holes. However the HMRC always lack the inventiveness of the market.

In short "Bed and Breakfasting" has been eliminated in name only. I'm guessing here that houses will be treated as shares for the purpose of Capital Gains Tax rules where

I can't see how selling to your partner would be the same as a spouse, although there are some tax rules which treat live-in partners in the same ways as spouses (ie Tax Credits), however generally personal taxation is just that - personal. I therefore can't see any problems.

Personally I would write to the tax office asking what are the consequences of a sale or gift to her, and what are the consequences?

Good point.

Robert