weird question: avoiding CGT by gifting to dying spouse

Here's a weird question. A and B are married and one of them owns an asset that has enjoyed a large capital gain. The asset can be passed one to the other without incurring CGT (since they are married) but once it is sold the CGT will be payable - unless the one owning it dies. There is no CGT on an asset owned at death. If the owner/deceased leaves in their will it to their surviving spouse there is no IHT either becuase bequests to surviving spouse are exempt.

So, for such assets, is the 'tax optimal' strategey to transfer ownership to the one who is more likely to die and for each to leave the asset to the other in their wills?

Is there any simple 'automated' way to do this?

I did say it was a wierd question.

Robert

Reply to
Robert
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It's not necessarily the tax optimal strategy, since it makes the IHT problem on the second death that much the worse.

A solution involving nil rate band discretionary trusts (if I've got the terminology right) is usually better if that is the case.

Reply to
dtren

Is this purely a theoretical exercise or do you have a particular example in mind? What type of asset are you considering, and how much capital gain is involved? Just roughly.

There is a string attached to the transfer between spouses by gift. If A owns the asset and gives it to B, and B then sells it, B is treated as having acquired it at the same time and at the same cost as A originally acquired it, so you can't get out of CGT that way. But A could gift a half share in the asset to B, and then if they jointly sell it, two annual CGT exempt amounts could mitigate any tax payable. They might even sell the asset in two instalments, straddling a tax year boundary, and get four exempt amounts that way.

I'm not sure whether the tax-free transfer between spouses by bequest (or alternatively by intestacy or by joint ownership) has the same string attached. It might be that if A dies and B inherits the asset, the asset is still treated as having been acquired at A's original time and cost. Normally bequests to non-spouses are treated as having been acquired by the heirs at date of death and at their market value at time of death, and payment of IHT (if due) cancels any pre-existing CGT liability. I'm not sure whether spousal bequests get "double" exemption. I suspect they may well not.

You can make an asset jointly-owned (as opposed to in shares). This is often done with the marital home. The effect is that no will is necessary to transfer the asset, because it is already deemed wholly owned by both co-owners, and if one of them dies, it immediately becomes the other's property without any reference to what the will, if any, provides. As the asset is already wholly-owned by B, A no longer has the power to dispose of it by will except if A or B first explicitly severs the joint tenancy.

Reply to
Ronald Raygun

In message , Ronald Raygun writes

No, B will be deemed to have acquired it at the value it was on A's death.

No.

Reply to
John Boyle

OK, so there would be merit in doing what the OP suggests, provided the object of the exercise is that the surviving spouse can sell the asset free of CGT after the first spouse's death. If the aim is to benefit *other* heirs, it would not generally be a good idea.

That's "No." as in "Yes they will.", is it?

Reply to
Ronald Raygun

Unless the surviving spouse enters into a civil partnership with the recently-divorced former-spouse of the potential beneficiary.

"Hey Mum, if Dad dies before you, will you 'marry' my ex-wife? - it's only for tax purposes" ;->

rgds, 'you wanted weird' Alan

Reply to
Alan Frame

yes indeed, but I am assuming that B keeps the asset until they die and A inherits the asset. There is no CGT at death (it's not, I believe, that the IHT is offset against it as another poster implied). A gets the asset at its value at the time of the death.

I take the point that A still has the asset and, if the aim was to pass it to the children, then A and B have failed to use B's nil band effectively.

To make it more concrete, suppose A and B have jointly owned a rental property for a very long time and that it stands with a very large paper capital appreciation. Of course, there are allowances against CGT but this seemed a neat way of avoiding it altogether.

But is there any way to configure ownership of the house so it gifted

100% to which ever spouse dies first with the gift taking effect shortly before the death. It can be in join ttenants with the % of ownership changed by letter. So one (illegal) way to acheive the aim is to have two reciprocal letters with the same date on file each giving most of one spouse's share to the other. The appropriate letter is 'lost' following the first death. Or (also illegal) the surviving spouse write the letter after the death and backdates it.

Is there a simple legal way?

This is idle curioisty BTW, not a concrete case.

Robert

Reply to
Robert

I see what you mean. The property is jointly owned and if you did nothing special, then for tax purposes the survivor on first death would inherit the deceased's half of the value. If it were then sold soon, the inherited half would have been acquired recently and thus accrued virtually no capital gain, but the survivor would still hold his or her original half as acquired at the original joint acquisition date, and so half the capital gian would always be taxable.

You want to engineer it so that just before A dies, B's share is gifted to A, so that B inherits both shares when A dies, thus being deemed to have acquired the whole value free of CGT liability.

Neat.

The reciprocal letter scheme is obviously a dishonest and hence illegal way of arranging this. But what you could do instead is just to make the property wholly owned by just one of them, and to switch ownership every now and then, i.e. whenever there has been enough capital appreciation since last time to make it worth while. Once the death of one is anticipated, when they become terminally poorly, make sure that's the one who holds full ownership.

That then only leaves a problem in the case of an unexpected death, when the "wrong one" dies. In this case the one left holding the baby would end up being liable for tax on the whole gain rather than just half of it. They could gamble based on the relative probabilities of expected vs unexpected deaths.

Another way is just to embark on a programme of realising the gain in small chunks by selling small shares in the property to willing third parties. Suppose the gain locked into the property is ten times the annual CGT exempt amount. Spouses A and B each own a half share in the property and thus are burdened by 5 exemptions' worth of gain. They each have a sibling, call them C and D.

A sells a one-tenth share in the house to C, and B sells a tenth share to D, this was 20% of the gain is realised tax free. A week later, C and D sell the shares to B and A respectively. The exercise is repeated each tax year, and after 5 years the job's done. Rinse and repeat as necessary to absorb subsequent gain.

Reply to
Ronald Raygun

This would trigger a CGT bill for B.

Reply to
John Boyle

No, it wouldn't. Interspousal gifts do not give rise to CGT bills but carry the caveat that the gain isn't realised at the time. Remember that A and B are married to each other. The trick in Robert's mad scheme is that once A dies, B inherits both A's original share and B's original share, both free of CGT and free of IHT and without being weighed down by age-old unrealised gain. It's brilliant but for the fact that B runs the risk that A might will both shares to his barmaid (or to her milkman, if context requires).

Reply to
Ronald Raygun

"John Boyle" wrote

I thought inter-spousal transfers did not trigger CGT?

Reply to
Tim

In message , Tim writes

Yes, completely misread it!

Reply to
John Boyle

You are right., that will teach me (once again) not to reply till Ive read everything!

Reply to
John Boyle

I think our friend must have had an extremely enjoyable lunch. Let's let him off and be happy for him.

Reply to
Ronald Raygun

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