Many will be familiar with the planning in which, say, husband gifts shares standing at a gain to his terminally ill wife (possibly on the day of her death). Gifts between spouses are on a no gain/no loss basis for CGT. She leaves the shares to him in her Will. The shares benefit from a CGT uplift to the value at the date of the wife’s death. The GAAR examples cover this and approve the planning (example D19).
HMRC raises the issue of capacity “HMRC’s view is that so long as Mrs Jones was in full capacity at the time of the gift the analysis would be the same and that the GAAR would not apply. This assumes of course that the gift was validly completed prior to death.” I am interested in forum members’ views (or, better still, the definitive answer) as to what the significance is of the wife/Mrs Jones having capacity (and conversely not having capacity) at the time of the gift. On one hand, I think the answer is fairly obvious, but someone has raised an interesting alternative view. I am purposely refraining from expressing those views in order not to influence others.
I am thinking of the logistics of the wife with capacity giving instructions for a will; it being drafted, approved, engrossed, and executed on the day of her death, all after the gift of shares had been validly completed. Sounds quite a task. On the other hand, if the wife does not have capacity, how can she make a Will?
Or, is there a presupposition that the wife has already executed a valid Will in which there is a clause giving her husband all the shares that she owns at the date her death, and would this cover it?
One must have sufficient mental capacity to make a gift (or indeed a Will).
If a stock transfer form were placed under the nose of the donor, who is asked to sign it without the donor having sufficient capacity to understand the meaning/implications of what is being done, then arguably the “donated” property is held on resulting trust for the donor.
It is possible to declare a trust by parol, so, again, if the donor had sufficient capacity, she could declare declare a bare trust over the shares. The challenge will be persuading HMRC that that was in fact done. I believe one case on this point was: T Choithram International SA and others v Pagarani and others - [2001] 2 All ER 492.
Thank you Paul. In this case the donor, Mr Jones, would have indisputable capacity to make a gift of his property (stood at a gain) to his terminally ill wife, Mrs Jones. It is Mrs Jones’ capacity that HMRC is concerned with and their comment indicates that if she lacked capacity, the analysis would be different.
I take that point and my expectation is that whenever such planning has taken place, the donor/Mr Jones already knows that the donee/Mrs Jones has a Will in place under which he is prime beneficiary. Given the illness and short lifespan, it is unlikely, but not impossible, that Mrs Jones would have time and/or the ability to alter her Will.
HMRC’s statement about the donee needing capacity to receive a gift is an example of one common feature of their psychopathology namely wishful thinking.
A donee may lack capacity to disclaim a gift or deal with the gifted property but the law provides avenues whereby a lawfully appointed representative may deal with it during her lifetime if incapacitated and, after her death, a person or persons entitled to act as executor or administrator, capacity or not.
If HMRC wish to prevent a gift which is validly made by the donor vesting in a donee without capacity, for tax purposes or at general law, they should secure a change in the law and not blight and frustrate taxpayer actions by a vaguely implied threat to challenge them which is not based on a strongly arguable legal opinion.
Though it is not wholly germane to the purely legal analysis what rational justification could there be for the proposition that a parent who purported to make gifts to an incapacitated child could not do that with legal validity so that others with a legitimate interest could challenge them as void?
Yes, I see your point, Stuart.
I think Jack’s last paragraph is in point. A person can be “incapacitated” (as such) by illness, or by age (by being under 18). If X declares a trust over certain assets - a bare trust for Y - this does not require Y’s acceptance for the trust to be effective. However, Y (or Y’s legally appointed representative) may disclaim that gift. I am therefore not sure what the legal point is that HMRC are making.
Perhaps they are considering a situation where Y (the recipient) is required to do something in order to receive the gift and someone (eg an attorney/deputy) does so on Y’s behalf - the question then being whether that someone acted lawfully in doing whatever it was that was required.
It would seem an odd situation if one could not make a gift to someone who lacked sufficient mental capacity to comprehend the implications of receiving the gift, except where the “gift” was onerous in some way.
Maybe it is not to do with legality but to do with circularity with no purpose other than to avoid tax. If the donee does not have the capacity to deal with gift however he or she wishes, then it must return to the donor in due course under the pre-planned scheme of things.
I accept of course that HMRC are not articulating expressly their view of property law but whether the law enacting the GAAR would apply. Even so they use a word “capacity” which has legal connotations. I find it hard to see how a unilateral gift to an incapacitated individual can amount to an “arrangement” still less one which is “abusive” as being a “course of action taken by the taxpayer [that] aims to achieve a favourable tax result that Parliament did not anticipate when it introduced the tax rules in question and, critically, where that course of action cannot reasonably be regarded as reasonable”: GAAR B11.1
I have presided over cross option arrangement between spouses in relation to their shares in a family investment company executed of course while each had capacity. The essential plan was for a spouse who was given a short time to live to exercise a call option to secure CGT market value uplift on their later death. I see no reason why the other party should not exercise a call or put option after the onset of a party’s incapacity.
The problem with a gift to a person without capacity or who later loses it is their severely restricted agency for doing much with the gifted property.
Spouses granting each other options seems a bit abnormal to me. I am not aware of many couples who do this, but then I probably don’t get invited to that kind of dinner party. So this seems quite different to the GAAR example D19.
I can understand the expected survivor exercising a put option when the non-shareholder spouse looks like they will not survive. But I don’t see how one party (the survivor) exercising a call option after the onset of a party’s incapacity (the expected non-survivor) helps. The party who exercises the option would not seem to get any uplift. And relying on the exercise of a call option by the expected non-survivor relies on them having capacity, whereas a pre-death gift does not.
There’s also the question of the exercise price. Make it a nominal amount and you save stamp duty. But the lower the exercise price, the greater the Part 7 ITEPA income tax risk. For example, income tax on the exercise of the option if:
the “unless” in s471(3) does not apply because, “in the normal course of” things, the HMRC officer doesn’t get invited to those kinds of dinner parties and so isn’t aware of what these kind of couples normally do, or
s473(1) applies.
So assuming someone is an employee or director (actual, de facto or shadow) you need to take care with the drafting to avoid it looking employment-related. Perhaps get moonpig to add the terms of the option as a message on a Valentine’s Day card which you then sign as a deed, with your solicitor having witnessed it first? Or if you don’t have that kind of intimacy with a solicitor, only give the Valentine to the love of your life if they give you a red rose in consideration?
I hope I just explained this poorly. The spouses are both shareholders. Cross options put and call are entered into while both have capacity. W receives a terminal diagnosis. She exercises her call option or H exercises his put option, the latter not needing her co-operation at a fraught personal time, so that she acquires his shares and gets the uplift. No gain/loss disposal for CGT (and s18 exemption for IHT) and price can be nominal or options can be granted under seal. A market value price may be good window-dressing if this causes only a minor nuisance.
Only a pre-eminent master of casuistry would consider that this is different to GAAR D19: the only variation is that the actual transfer is triggered by exercise of an option allowing the greater flexibility of an actual transfer only if necessary.
A trap for the unwary is that a lifetime transfer between spouses requires the transferee to hold for 2 years to acquire BPR (if the company itself qualifies). This can be covered by the shares being left by Will to the surviving spouse and not in a DT (though s.144 may ride to the rescue).
It is prudent to be sensible after the (myopically pernicious) decision of the SC in Vermilion but the option here is not granted by the employer. In my view s.471(1) does not apply as the option arrangement is simply not available by reason of either spouse’s office of director or employment with the FIC but is purely an estate planning operation in the capacity of fellow shareholders.
I accept that the warped psychopathology and self-serving epistemology of HMRC could generate a bizarre idiosyncratic concept of “normal” but, despite Vermilion, I would trust the judiciary to find either that s.471(1) did not apply or that s.471(3) did.
To hold otherwise would force them to regard the actual transfer, either without any option or after exercise of it, as falling within s.421B(1). A market value price seems to leave HMRC up the creek without a relevant statutory Chapter with which to paddle. They too seem not to attend, as I do, the right dinner parties.
The Vermilion judges in the SC (like those in Miller 2) remind me of the old story of the cavalry officer who was SO stupid that his fellow officers noticed it. Nevertheless, we all stand warned that a plethora of such individuals really do inhabit even the most august levels of society.