Chapter: 2 - Inheritance Tax Mitigation: The Basics

Capital Gains Tax

2.14.2

Lifetime IHT mitigation will in the normal course (except where sterling cash is given) involve what amounts to a disposal for CGT purposes.  The gain in the hands of the transferor will be a chargeable gain computed on normal principles, which, subject to the annual exemption, will attract CGT at 18% (in 2009/10).  Of course, if either the asset is a qualifying business asset or there is a chargeable transfer for IHT purposes, the gain may be ‘held over’ (under TCGA 1992 s165 or s260): see 3.7.3.  This assumes that the transferee is UK resident.  However, if he becomes non-UK resident within broadly the following six years the held-over gain will crystallise (subject to two qualifications), to be charged first on the transferee and then, if he fails to pay within twelve months, on the transferor (TCGA 1992 s168).  So the CGT impact of any gift must be considered.

TAX TRAP:  Anyone (but especially trustees) making a gift (capital advance) and deferring the gain by electing for hold-over should recognise the possibility of the deferred tax charge failing on him if the donee/beneficiary emigrates and fails to pay the tax within the statutory time limits.

Disposals now, forestalling a future CGT rate increase?
(a)  Whatever shade of Government we have after this year’s General Election, professional opinion is generally agreed that an increase in the rate of CGT is more than likely in 2010/11.  We are therefore back into territory last occupied in 2007/08 where every effort was being made to secure the 10% business assets rate of taper relief before the repeal of taper relief from 2008/09. 

The scenario is that, while a disposal of a particular asset is reasonably foreseen over the next few years, no purchaser is yet on the horizon.  The suggested solution is to trigger a disposal by making an unconditional contract before 6 April 2010, so fixing the date of disposal should the contract be completed, but giving the purchaser the right to rescind in the event that an appropriate purchaser is not found.

(b)  The contract made now must, of course, be sufficiently certain in terms of parties, subject-matter and price, among other details.  The purchaser could be a family settlement or equally another member of the family or a company such as to import the market value rule of TCGA 1992 s18.  The contract price would be say 99% of market value at the date of completion, which would take place on a date to be determined within the following six years.  The price payable on exchange of contracts would be nominal.

(c)  CGT will become payable only once the contract is completed, though with interest running from 31 January 2011 (currently at 3%).  It is suggested that full disclosure is made in the 2009/10 self assessment return, though not strictly required, specifically to stave off any prospect of penalties, however unlikely.

Where the subject-matter of the contract is land, there would be no substantial performance such as to trigger a liability to SDLT, that is less than 90% of the price is paid and the purchaser does not enter onto the land.

Once the third party purchaser is found, the original purchaser enters into a separate contract.  Under a sub-sale with conveyance direct from the original vendor to the ultimate purchaser.  SDLT will be payable only by the ultimate purchaser.
 
CGT at 18% will be paid on the gain based on market value at the date of the contract.  CGT based on any increase in value before the completion date will be payable at the rate then in force (let us assume 50%), with a possible residual Income Tax liability on the gain of 1% market value at that stage.

Example
Bertha bought Blackacre for £100,000.  It is now worth £500,000. She contracts to sell to a family trust on the above basis. In three years time (2012/13) a purchaser is found when Blackacre is worth £600,000, in which tax year CGT is charged at 50%.  The price payable on completion is 99% of the then market value of £600,000, ie £594,000. 

In 2009/10 CGT at 18% is paid on the gain of £400,000, that is £72,000.  In 2012/13 CGT at 50% is payable on £94,000, that is £47,000.  Income Tax at say 50% is likely to be payable on £6,000, the increase in value between the dates of contract and completion, ie £3,000.

On this scenario total tax payable is £72,000 plus £47,000 plus £3,000 = £122,000, as against CGT at 50% on the gain of £500,000 or £250,000, for a contract in 2012/13.

(d)  HMRC might choose to disregard the first contract on the grounds that (i) it had no commercial substance; or perhaps (ii) it was conditional; or (iii) a disposal was never intended in the absence of an ultimate sale to an unconnected third party.  Alternatively, the arrangement might become vulnerable to subsequent retro-active legislation.

If forced to concede, the additional tax plus interest would of course become payable, but on the basis of full disclosure it is hoped no penalties.  There would of course be increased professional fees.  [17 March 2010]