CGT query on investment property held as JTs

Trusts Discussion
1

Good evening

Please could you assist me with this fairly common scenario (I imagine).

H and W owned investment property as JTs. H died in Feb and wife now wants to sell. She is sole owner now by survivorship obviously. She has been advised by her accountant to transfer a share of the property to her two children so they can benefit from three annual exemptions and these are needed as the property has significantly gained in value since they bought it. But would this work?

My understanding is that you deal with the two shares separately.

Wife’s original 50% share (call this Share 1) - sale price on that share less cost of the share when bought. Significant gain.
50% share passing by survivorship (call this Share 2) - sale price on that share less value of that half as at date of H’s death. No gain.

Surely wife is only able to use her own CGT allowance on Share 1 as only she has incurred the gain. She can’t make a gift of Share 1 to her children as this in itself would be a disposal for CGT of an asset pregnant with gain.

If W passes on Share 2 by gift or by deed of variation to children then what good would this do? There’s no gain on this share as H only died in Feb.

What I’m asking in a round about way is this -is it possible for the three annual exemptions to be used on the gain made by Share 1 only?

Surely not? And if not is there anything now that W can do to reduce the tax payable on the gain on Share 1.

Hope this all makes sense.

Thank you in advance for your assistance
Deborah

2

I agree with your analysis. Normally, the name of the game is to split a single sale into a number of sales so as to utilise multiple CGT annual exempt amounts. This is demonstrated below under Case A.

However, in your case, 50% of the ultimate selling price equals the probate value of H’s 50% on death.

Case A
Option 1. On H’s death his beneficial interest passes by survivorship to W. W’s base cost of property is original cost of her own 50% (say 40) plus probate value (ie mkt value, say, 70) of H’s 50%; total base cost for W 110.

Option 2. Alternatively, W could sever the JT and then execute a DoV wrt H’s 50% to her two children. W’s base cost of her own 50% (ie 40). Base cost of each of child’s 25% interest 35 (ie half of 70).

Example

SP 600,000.
W’s base cost of own 50% 40,000
W’s base cost of H’s 50% share on death 70,000
AE 12,300

Option 1
W CGT
CG = 600,000 - 110,000 - 12,300 = 477,700

Option 2: Severing plus DoV option
Each child’s CGT will be = 150,000 - 35,000 - 12,300 = 102,700
plus W’s 300,000 - 40,000 - 12,300 = 247,700

W plus two children CGT aggregate 2 x 102,700 + 247,700 = 453,100

Option 2 therefore produces the lower aggregate CGT charge.

Case B
However, using above figures but with an SP of 140,000 (ie no gain on H’s 50% valued 70,000) then the calculations are as follows:

Option 1
W CGT
CG = 140,000 - 110,000 - 12,300 = 17,700

Option 2: Severing plus DoV option
Each child’s CGT will be = 35,000 - 35,000 - 12,300 = Nil
plus W’s 70,000 - 40,000 - 12,300 = 17,700

W plus two children CGT aggregate 17,700

W severing JT and executing a DoV in favour of two children (if H’s 50% share on death equals 50% of SP) CGT same under either option.

Malcolm Finney

1 Like
3

Thank you so much for this Malcolm it’s really helpful and I’m pleased you agree with my analysis! It was causing me a headache for a while there.

I’m meeting W this morning - all I need to know is whether the property has gained in value significantly since February (date of death) - possible I suppose. If it hasn’t then there is absolutely no point in doing a DofV. Wife might as well sell in her sole name.

Thank you again - have a nice day!

4

Slightly unrelated, but one additional consideration that I would take into account with a similar set of circumstances is the IHT exposure. By effecting the DoV directly to children the TNRB is being reduced. I am sure I have come across this before, but unusually making the DoV effective for CGT purposes only would mean the TNRB is preserved in full. (I am sure @malcfinney1 will confirm or correct me if I have overlooked anything.)

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5

As Haroon infers, when a DoV is executed it is possible to “read back” for both CGT and IHT purposes or just one or the other.

As he points out where, in the present case, there is reading back for IHT any possible NRB transfer will be reduced which is avoided if no reading back for IHT applies whether reading back applies for CGT or not.

Whether reading back applies for CGT usually depends upon the extent of any increase in asset value between date of death and date of execution of the DoV; in many cases any such increase often falls within the annual exempt amount in which case avoid reading back for CGT.

Malcolm Finney