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