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Most efficient way to make a gift and protect son’s assets.
A client husband (H) died leaving the whole of his estate to his widow (W). They owned two properties, one being the matrimonial property where W now lives alone and a second property in which the son lives as his only residence and he plans to stay there long term.
W wants to make a gift of H’s half share in the second property and it is suggested that she makes the gift by way of a deed of variation. The intention is to put H’s half share into a discretionary trust and W will be excluded as a beneficiary. The son and his children will be beneficiaries of the trust and the trustees will exercise their discretion to allow him to continue to occupy the property. The trust route is being pursued for asset protection purposes for the son. He was divorced previously and did not do so well on the financial settlement and W wants to do her best to avoid a repeat scenario.
W’s estate may be liable to IHT. If she makes the gift with no election to read back the gift for IHT she will make a chargeable lifetime transfer and so, if she survives seven years, it will be outside of her taxable estate. The half share is worth circa £200,000 and W has made no other gifts. If she dies within seven years then we can at least reduce the taxable value of the gift by using two years’ worth of annual exemptions. This is seen as a better route than making an IHT election which will use up part of H’s nil rate band immediately.
The other consideration is that W’s half share will be discounted when she dies by 15% for IHT due to the fact she will own one half only.
With regard to CGT, the value of the property is not thought to have changed since the date of death. There will be an election for reading back to apply for CGT to the date of death value and whenever the property is sold the half in trust will be covered by main residence exemption it being the son’s only residence.
This seems to be the most tax efficient way to make the gift. Is the thinking sound or is there a better way to structure this?
Query 20,435 – Noor.
Would capital receipt be subject to CGT?
An unincorporated club is making a distribution, mainly from the proceeds of selling a property on which the club will pay corporation tax on its capital gain. The full circumstances are shown below in my original question (Q 20,360):
‘Are the members of an unincorporated club taxable when the club distributes unwanted funds to the members in accordance with the club constitution which caters for such a distribution pro-rata to years of membership?
- No member has paid an initial contribution.
- Members pay an annual subscription.
- There is a surplus from mutual trading, but much of the distribution will be from the sale of the club premises.
- The club will be liable for CT on the gain.
The premises were used by the members except that there was a flat above with shared access rented to tenants. The club has paid CT on the net rental income.
Would the answer be different if the distribution was on a winding up?’
The tax consequences for the members were published in Taxation, 25 July 2024 (tinyurl.com/4fh4n9b6). Although the readers opined that, if the amount received by a member was more than £2,000, it would be treated as a capital receipt, no opinion was given on whether such a capital receipt would be subject to CGT for the members.
The distribution is imminent, and members are asking me.
Query 20,436 – TheythinkIshouldknow.
Is it too late to put deposit in joint names?
One of my clients sold a business last year and immediately put a large amount of the proceeds on a time deposit in his sole name for a year. When it matures, he will be taxable on a large amount of interest income. Had he asked me first, I would have suggested that the deposit should be in joint names with his wife, who is a basic rate taxpayer. Is it still possible to take advantage now, as the interest will only be taxable on receipt? If it is, what is the minimum action required – would it be enough for him to make a declaration that he has given half the money to his wife, or would it be necessary to tell the bank and put the wife’s name on the account?
Query 20,437 – Minted.
Business splitting problem?
I have just taken on a new client who operates a self-storage company which is VAT registered. The director also wishes to open a gym and I’ve suggested she operates this from a new company.
She doesn’t think the gym income will be above the VAT registration threshold so doesn’t have to or want to register for VAT but she wants to be able to claim the VAT back on all the gym equipment she’s going to buy because it is a significant capital investment. She asked if she could buy the gym equipment through her self-storage company, claim the VAT back and then rent the gym equipment to the new gym company. My concern is that this would indicate some sort of income splitting arrangement and risk an HMRC direction to treat the two entities as a single business. Are my fears justified? If so, is there any alternative solution? The total purchase of equipment will be less than the capital goods scheme threshold if this is relevant.
Query 20,438 – Exerciser.
Queries and replies
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