Gifting a property over different tax years to avoid CGT

Dear all, I have not come across anyone doing this yet, but hopefully someone here has done it themselves! It is not uncommon to have a parent buy a property for a child to live in, and then realise they have a CGT liability by putting it into their child’s name later on, or moving the property into trust for longer term protection etc. Without very clear evidence that this was the original intention, then HMRC will rightly say that CGT must be paid.

If this was a shareholding for example, you could sell part of the shareholding to use up your CGT allowance and after a number of tax years, the whole shareholding will have passed over CGT free. Is there any reason this can’t be done with property? If the parent makes a gift via a declaration of trust each tax year, they could work out the amount that could be passed CGT free, and after 5 or 6 years for example, they could have moved their ownership completely over to their child (assuming the property is not sold in that time). The property could then be transferred into the child’s name on the title documents, and the parents can point to the declaration of trust to say that no CGT is payable.

I look forward to your thoughts on this!

The main problem here is TCGA 1992 s 19 which deal with a series of transactions made to a connected person.

Malcolm Finney

There are practical problems, such as the continuing increase in property prices. However, if a parent transfers half the property say on 1 March, and then six months later transfers the other half, I can’t see a problem as long as they are undertaken as independent transactions. In these circumstances, I advise my client that the first half can be transferred, and in six months time they can then consider if they want to transfer the second half. Its not guaranteed that they will do so, and in fact only today, I met with a client who transferred half six months ago, but sold another property recently and therefore is not proceeding with the other half.

There are always problems with the situation where professional advisers lay out a proposal that involves a client taking one step at a certain point and then, after say 6 months, the client taking some further step which is said to be an independent transaction. However much this is dressed up, I see it as a preordained series of events. You only have to consider what HMRC would say if, at that later date, the professional were invited to lay his original letter of advice before them. You can see they would certainly say that the later action had been preordained, and tax it accordingly. Where successful these schemes depend on the concealment of the course of action.

Julian Cohen

Simons Rodkin

I agree with Julian in the way set out in his message. It is preordained if the original letter of advice refers to the transaction taking place in six months. However, IMHO it is entirely different if you advise the client that they could have a reduced liability, or even avoid the liability and having to file a return, if they only transfer say half the property, and go on to advise that the matter could or even should be reviewed in six months time. File closed. In six months time, who knows, lettings relief may not apply as favourably, the property value may have gone up (or down) considerably, the clients personal circumstances may have changed, the tax rates or law may have changed and to cast in stone that the client ‘will’ or ‘must’ do something in six months would perhaps be pre-ordained, but is definitely rather foolish. The last couple of years with tax changes and dramatic increases in property only evidence the risk in soothsaying.

On a separate note, I am not convinced that s19 necessarily applies in these circumstances. (GAAR may do so.)

I thoroughly endorse Julian’s comments. It is more important than ever (and it always was) that any tax planning arrangements must still work even if all the cards can be placed face up on the table for HMRC to see. When this is done, if at all, will be governed by the law but may even prove useful as a positive tactic when the law does not strictly require it, to head HMRC off from making a meal of things.

Many of my clients carried out complex multi-step tax planning but were, and were made, fully aware that their worthwhileness would ultimately depend on being defended in the full glare of disclosure including of who really and truly intended what and when.

Clients hate unforeseen consequences. One may be that penalties for failure to notify or deliberate and concealed notifications are severe and culpability may be judged subjectively and harshly with hindsight by soi-pensant moral superiors. There may now be a premium on obtaining even contriving early HMRC engagement with the issues.

Another is that you do not necessarily go back to square one: the transactions in the series may retain their full individual tax and other legal consequences even if construed purposively they fail to achieve overall their principal tax objective. In Furniss v Dawson, as early as 1984, the intermediary company’s role was ignored in taxing the share sale but the sale proceeds were trapped in it in stark reality and the sellers could not argue that they should be treated as having received them personally just because they were taxed on that basis.

Starting with disclosure/notification to HMRC all tax planning is from the outset incipient litigation, even if most does not get into the Tribunal or beyond. The prospective downside of not succeeding without having to litigate should impact at the outset on a client’s analysis of viability pre-implementation. As well as cost, hassle, and uncertain outcome, the inevitable publicity of an appeal can be so unwelcome as to scupper a sound technical case and HMRC are fully tuned-in to that. The likely target for remediation of unforeseen consequences is likely to be the adviser that omniscient predictor of all downsides.

I’m not sure why you think s 19 is not in point?

Transferring an interest in property by a series of parts of that interest over time is I suggest precisely what s19 is designed to encompass.

Malcolm Finney

I believe s19 TCGA would have the effect of disallowing any discount which might otherwise be claimed in calculating the market value of each share gifted, but it would not cause the various disposals to be treated as all occurring in one tax year. The main benefit of making the gifts over a number of tax years is to make use of personal allowances and (possibly) lower tax rates, and I don’t believe s19 would prevent that.

TCGA 1992 s19 does not deem the separate disposals to occur in one year and thus more than one annual exemption may be available.

Malcolm Finney

Diana has essentially answered for me. (Thank you.) The example in the manual refers to selling/gifting items individually that are part of a set. For example gifting a Chippendale table and chairs. The items singly are worth much less than their appropriate portion and to spread this out as a series of transactions is caught. (Not my example, I would struggle to differentiate a Chippendale from and Ikea set!) CG14650 - Capital Gains Manual - HMRC internal manual - GOV.UK

Thank you for the comments so far. It is interesting to see there is a difference of outlook over the legislation that might potentially affect this transaction. If the house was instead a large shareholding, I see no issue with an individual using their annual allowances to transfer over the shareholding over a number of years? Anything could interfere with this, but in each tax year, if it is possible to make the transfers up to the CGT allowance, then that person could decide to continue the gifting. I don’t think this is something that HMRC would be interested in, but I understand that if there is an agreement to buy a single item, and that is split into segments over a period of time, that HMRC would be more interested, or if a set was valued individually, rather than as a set etc.

I think in my example (a real life one the clients are pondering), if they start the process by transferring 10% this year for example, anything can step in the way next year. A client may go into care and their share might need to be sold for example, so it is a series of transactions, but one that has to be assessed every year. I would have thought this would be the same for a trust, if the individuals are trying to use their allowances in full? The issue might be that selling shares each year is the sale of many individual items, rather than a house which is one item? The key must be what is the key principle here? Is it that if I agree to buy an asset from you, then the agreement should not be to split the asset into chunks? Or is it to avoid a set or items being given a lower individual value? Or is it both of these things?

Diana and Malcolm have stated the position correctly.

I would add that HMRC deal with the sort of arrangement you describe in their manuals (at para CG18150). They may want to examine what your client has done, to ensure that separate disposals have happened as you describe, but if you get all your paperwork right, that ought not to be a problem. GAAR shouldn’t apply, because relying on HMRC’s guidance is not ‘abusive’.

Paul Davies
Clarke Willmott LLP