Husband (H) owns buy to let property worth (conveniently) £650,000 and wishes to put it into a discretionary trust.
However, H decides to transfer property into joint names of H and W first - as they’re married it takes place on a no gain no loss basis for CGT purposes.
H then settles his half share into a discretionary trust and W does the same into a separate discretionary trust.
Does this fall foul of s.268 IHTA 1984 and the rule against associated operations?
I know that gifts between spouses are usually not caught by s.268 (see IHTM 14833, and the Treasury statement to Parliament in a Press Release dated 8 April 1975), but it is not altogether clear.
My instinct on this, for what it’s worth, is that a married couple arranging their affairs to make use of all allowances available to them is not normally frowned upon, and falls into the ‘mitigation’ rather than ‘avoidance’ category (the latter having seemingly become the equivalent of ‘evasion’ these days).
At the same time, it feels as though associated operations may well catch what is a relateively straightforward situation such as this.
I do not recall HMRC ever suggesting that they wished to challenge deliberate equalisation of estates by spouses or civil partners with a view to their then embarking on their own straightforward individual estate planning.
The GAAR has no specific example but it does have one at D19 on CGT, which sets out a pretty saucy strategem that is accepted. It is of course uncomfortable to rely on HMRC’s unpublished and supposed self-restraint but it must be made clear to clients that the risk is ultimately theirs and not yours.
Private clients need to be taken especially carefully through the possible outcomes and their probabilities and their own final responsibility for them, because they are not used to making tax risk assessments whereas business clients do so on many fronts almost on a daily basis.
This is standard tax planning and will happen often. There is currently no restriction on spouse to spouse transfers and it is not caught under GAAR.
Lucy Orrow CTA TEP
Lambert Chapman LLP
Thank you both for your replies. My understanding had been the same as Lucy’s, but I had begun to doubt myself.
The process of analysing the tax position as set out in the example at D19 of the GAAR guidance is helpful and reassuring, I think, when applied to my original query, i.e.
The main purpose of the arrangement is to obtain a tax advantage.
The substantive results of the arrangements are consistent with principles on whcih the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions, i.e.
(i) assets can be transferred between spouses on the basis of no gain/no loss
(ii) a person can make a CLT up to their available nil rate band without incurring an IHT liability
Achieving the substantive tax result does not involve one or more contrived or abnormal steps. The transactions are normal arrangements between spouses.
The arrangements are not intended to exploit any shortcomings in the relevant tax provisions.
Does the tax arrangement accord with established practice? I believe so, and IHTM 14833 would seem to confirm that, whilst retaining an avenue of attack for more complex transactions (which presumably would have to include contrived or abnormal steps).