A client has recently sold his shares back to a family company and will be receiving payment in tranches over a period of 10 years. A query has been raised by the Accountants regarding the client gifting the right to receive those future payments to his daughter, when would the 7 year clock commence. Would it be from the date of the gift of the right to receive the payments or would it be from the date that the actual payments are received?
The right to receive the future payments is a legal chose in action which can be assigned by s.137 LPA 1925, most securely with formal notice given to the debtor. This is not a right which is intrinsically non-assignable so it can be assigned provided it is not made specifically non-assignable by the contract.
I suggest a Deed be used which makes it clear that the gift of the right is intended as an immediate gift on due execution of the deed and deals with the obligation to give notice to the debtor.
It is important to assign the right to receive the future payments and not the payments. This is because a gratuitous assignment of future payments is not valid unless made for consideration (when it functions as a contract to assign) and even if token consideration is given (and works, which is not certain in law) will only transfer the payments at each future date of actual assignment. A deed, which conclusively resolves the validity issue, if drafted to do so, will effect a TOV (of the chose in action) for IHT on execution.
What about CGT? The right is a chargeable asset: CGM13000, 14850. The deed will be a disposal of the right at market value under s.17(1) TCGA. Although the disposal proceeds (presumably ascertained) of the shares are not discounted, though payable by instalments, because s.48 so provides, that section will not apply to a disposal for market value so will be based on the discounted value of the future receipts.
What is the donor’s base cost? Ideally it would be that same market value: the problem is whether that right was disposed of by the debtor since, if not, s.17(2) would apply nil consideration: CG14550. Can the company buying the shares be said to dispose of the right to the purchase price? It would be very unfair for the donor to have a nil acquisition cost as the purpose of the subsection is to deny a loss on a later disposal computed by reference to a “base cost” not actually paid on acquisition. If the donor takes the view that the company disposed of the right at the same discounted market value as that which the donor is then deemed to receive on the later gift disposal then no gain no loss. That does not seem contrary to the purpose of the statute—no loss will be claimed. There is however no official guidance.
The donee will acquire at that discounted market value and will make a part disposal each time an instalment is received. These sums will not be discounted so I fear there is no escape from the fact that some gains will arise.
It is not stated whether the donor has claimed instalment treatment under s.280 TCGA. There is no official guidance in CG14910 or SAM80072 and 4. Does the treatment stop and all remaining tax become payable if the right to receive instalments is disposed off (a) for consideration or (b) for none?
Where no official guidance is published on an issue the unavoidable dilemma is whether to adopt a view and fight any challenge or seek to clarify the issue with HMRC, preferably before taking the contemplated action, and risk flagging it up unnecessarily and getting an unfavourable answer. This is often a function of the individual taxpayer’s appetite for risk.
Jack Harper