should also be remembered that such transfers could
be challenged by HMRC under what is known as Ramsay
principle. In this famous tax case it was held by
the House of Lords that the courts must look behind
the individual steps of a transaction to ascertain
the legal nature of the series of transactions as
decision in the case was interpreted as meaning that
the courts were entitled to disregard steps in a transaction
(whether or not achieving a legitimate commercial
end) inserted for no commercial purpose other than
avoidance of tax liability.
relation to transfers of property between spouses
or civil partners, for Ramsay to apply, the inter-spouse/civil
partner transfer would have to form part of a series
of transactions designed to produce a tax benefit,
or be a sham. For example, this could occur where
the transferee spouse or civil partner agrees to return
an equivalent sum to the transferor rather than keep
the asset as would be the case with an outright gift.
transfer made only shortly before an eventual sale
to a third party could also come under scrutiny by
highlighted above, the gift of a property is taxable
even if no money changes hands. If the exemption for
transfers between spouses and civil partners does
not apply, it may be possible to get around the CGT
implications by using a discretionary trust.
In simple terms a trust is set up and the property
is transferred into it. The trustees have the discretion
to decide on various matters relating to the trust,
the property held within in, and the entitlement to
income etc. paid to the beneficiaries. Once the trust
is set up, the person to whom the transferor wishes
to give the property becomes a beneficiary of the
would normally be a CGT charge at this stage, but
it is possible to postpone this by making an election
(under Taxation Charge Gains Act 1992, section 260).
Broadly, this election transfers the profit on the
property already made to the date of transfer into
the discretionary trust. When the trustees eventually
sell the property they will pay tax on the increase
in value of the property from the date it was originally
acquired. Note that the person transferring the property
cannot be a beneficiary of the trust for these purposes,
as the CGT relief is not available in those circumstances.
The same applies to spouses, civil partners and minor
gift of a property into a discretionary trust is subject
to an immediate inheritance tax (IHT) charge calculated
at a lifetime rate of 20% on the value of the property
in excess of £325,000. So if the property is
worth less than £325,000 and no other assets
have been gifted into a discretionary trust within
the last seven years, IHT is charged at 0%, and no
tax is actually paid.
Duty Land Tax
duty land tax is not charged on the value of inter-spouse/civil
partner gifts as long as the property is not mortgaged.
is recommended that proper proof of gifts between
spouses and civil partners is retained, and where
the transfer involves property or shares, the proper
legal formalities must be complied with. It may also
be helpful to write a letter to accompany the gift.
article was originally published here.
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