Capital Gains Tax on discounted sales

Is a sale to an unconnected person subject to Market Value?

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My soft-hearted client has agreed to sell a let property to her tenants at under-value and will not believe me when I tell her that, as they are not connected persons, she only has to pay CGT on the actual proceeds.

The tenant's lender is conniving in the arrangement, stating the market value as the sale price and demanding that my client sign a 'gift of equity' document. Again that rolls off my back because there is no connection between the parties.

There is a tax case (Day and Anor v Revenue & Customs [2015] UKFTT 142 (TC))  in which HMRC lost, partly because of the connivance of the lender as in this case.

My problem is that the client has phoned HMRC and spoken to the staff, with all their eight weeks training, and they are reading from the HMRC website;

"In some situations you should use the market value of the property when working out your gain. Do this if:  .... you sold it for less than it was worth to help the buyer"

It looks like HMRC are spoofing taxpayers into paying on Market Value as if they had WON the aforementioned tax case!

To me it is simple - sales at under-value to unconnected persons are not a CGT problem. What does the community think?
 

Replies (42)

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By Justin Bryant
15th Feb 2024 11:11

"My soft-hearted client has agreed to sell a let property to her tenants at under-value"

Why on earth does that not engage s17 TCGA 1992 to deem a MV disposal on arm's length terms (i.e. per s272 MV case law)? After all, that's exactly what it's there for.

S18 is an additional MV rule that prevents bad bargains applying between connected entities and is not relevant here. That's all.

In other words, you are allowed to have bad bargains for CGT purposes only with unconnected entities, but this is not a bad bargain properly so called is it? It's basically a deliberate (partial) gift due to the sale being deliberately at an undervalue. In other words, you don't call gifts (or the gift element of a deliberate undervalue sale) a bad bargain do you? In other words, just because I sell a £1m house to an unconnected stranger for £10 does not mean that that is a bargain made on arm's length terms does it? In other words, it does not need to be a 100% pure gift to be caught by s17, otherwise it would be very easy indeed to avoid wouldn't it (with such deliberate under value sales)?

I recall that very simple point confused WP quite a bit (he seemed to think a bad bargain was the same thing as a gift).

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By Ruddles
15th Feb 2024 11:21

To me it is simple - sales at under-value to unconnected persons are not a CGT problem. What does the community think?

What do I think? It is far from being that simple.

A non-arm's length sale to any person - connected or otherwise - may be treated as made at MV (TCGA 1992 s17). s18 effectively means that a transaction between connected persons will always be subject to s17 treatment. It does not mean that all transactions between unconnected persons will be outside s17.

An arm's length transaction is, loosely, one in which both parties seek to get the best result that they can. So the question is why was the property sold at undervalue in this case? Not enough info to go on but at first blush it doesn't sound like an arm's length transaction to me.

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Replying to Ruddles:
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By Justin Bryant
15th Feb 2024 11:23

That's very badly explained indeed, but nevertheless the correct answer for a change. Unlike WP (and others) here:
https://www.accountingweb.co.uk/any-answers/sale-at-under-value

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Replying to Justin Bryant:
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By Tax Dragon
15th Feb 2024 13:12

I agree with you on this thread as I did on the other, but it is important to recognise that the test is whether the sale was at arm's length, not whether it was at market value. The two are not synonymous. (Incidentally WP recognised that point and you, as you often do, misrepresent the views of one of your fellow contributors.)

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Replying to Tax Dragon:
By Ruddles
15th Feb 2024 13:29

Tax Dragon wrote:
the test is whether the sale was at arm's length, not whether it was at market value.

Indeed - I don't know if there is a material distinction to be made, but the legislation refers to "at arm's length" and not to "on arm's length terms".

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Replying to Ruddles:
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By Justin Bryant
15th Feb 2024 14:10

I am pretty sure there's no material distinction per my below comment. After all, bargains have to have terms don't they? A gift has no terms (and is not a bargain in the first place) and a deliberate under value sale has terms that are not arm's length.

This thread has become a somewhat boring attempt to split hairs, so I'll end there. See:

https://www.taxinsider.co.uk/transferring-property-ownership-tax-tips-an...

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Replying to Justin Bryant:
By Ruddles
15th Feb 2024 15:52

Justin Bryant wrote:
a deliberate under value sale has terms that are not arm's length.

Thank you for confirming my point. A deliberate under value sale may have terms that are not arm's length (ie a price which is lower than market value) but the transaction may still be undertaken at arm's length. Facts and circumstances are crucial.

just because I sell a £1m house to an unconnected stranger for £10 does not mean that that is a bargain made on arm's length terms does it?

Correct. But it doesn't mean that it isn't [a bargain at arm's length]. Granted, in your extreme example it probably wouldn't be. But in the real world, what about the owner that sells a £1m property for £950k to secure a quick cash sale?

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Replying to Justin Bryant:
By Ruddles
16th Feb 2024 12:36

Justin Bryant wrote:
... so I'll end there.

QED

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Replying to Tax Dragon:
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By Justin Bryant
15th Feb 2024 14:05

Not sure what you mean (as usual). If it ain't on arm's length terms, MV will be deemed to apply. If it was on arm's length terms, then it's obviously not necessary to consider MV in the 1st place e.g. sometimes there's a quid pro quo re another transaction (or the overall transaction) so that all together it's arm's length terms. See para 60 here: http://taxandchancery_ut.decisions.tribunals.gov.uk/Documents/decisions/...

WP was making a more fundamental error if you read that other thread per my above comments (but he sparpled to try cover it up).

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By AndyC555
15th Feb 2024 11:40

"To me it is simple - sales at under-value to unconnected persons are not a CGT problem. What does the community think?"

I think s17 TCGA 92 applies to disposals "otherwise than by way of a bargain made at arm’s length" and doesn't require that the parties are connected.

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By Roland195
15th Feb 2024 16:22

Presumably by selling to the tenant, the process & costs of marketing the property are avoided. The seller is aware of the tenants situation and has some degree of trust in them so there is less chance of last minute changes or mind & chains collapsing and obviously the need to formally evict is sidestepped with all the expense & peril of that.

This being the case, factoring in these considerations it could still be considered a sale at arm's length on a sound, commercial basis.

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Replying to Roland195:
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By Tax Dragon
16th Feb 2024 07:29

All very true. The reason that, on this occasion, I think Justin is correct and MV almost certainly applies is that the seller is saying MV applies - the seller herself does not think she is entering into an arm's length transaction.

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Replying to Tax Dragon:
By Ruddles
16th Feb 2024 08:14

Probably. But the one thing that still causes doubt in my mind is the 5th (or is it 6th?) word in the OP’s post.

We’ve been given precious little information about the background, reasons etc for the transaction. Is it for instance a “£1m for £10” transaction or closer to a “£1m for £950k” transaction?

Was the client’s agreement reluctant?

As I said above, facts and circumstances are crucial.

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Replying to Ruddles:
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By Tax Dragon
16th Feb 2024 09:14

I'll soften my "almost certainly" to "very probably".

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Replying to Tax Dragon:
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By Roland195
16th Feb 2024 09:42

I rather got the impression that this notion has come from the purchaser's prospective mortgage lender. The agreed sales value being lower than the home report (or market value in the eyes of the Property Market) is doubtless firing off all sorts of red flags & complications.

Up until this point, I doubt the seller would have had any thoughts one way or other on the matter.

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Replying to Roland195:
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By Tax Dragon
16th Feb 2024 10:19

That hadn't occurred to me, possibly because I've bought property, have a mortgage, and at no point thought to share the value the mortgage provider used with the person selling me the property. I don't remember for sure, but, as it was an arm's length sale, I think my mortgage-provider may have "connived" with me to use the actual consideration as the market value.

In contrast, we recently had a tenant client [agree to] buy a property at less than 75% of the market value. This caused the mortgage-provider all sorts of difficulties that I couldn't (and still don't) understand.

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Replying to Tax Dragon:
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By Roland195
16th Feb 2024 12:19

I suppose the prospect is an abhorrence to the property market in general - I bet even the neighbours would object to the transaction as they would be concerned it will bring their own property value down when the details are shown on Rightmove etc.

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By fawltybasil2575
16th Feb 2024 11:41

@ davidross[OP].

Frankly, there is not enough information in your initial question to determine whether the market value should be used for CGT purposes or whether (as you believe) CGT should be based upon the actual sale proceeds. The use of market value [per S.17(1)(a)] is required if the proposed transaction is (this is the crucial point) an arm’s length one.

Let us consider two scenarios, at "each end of the scale", re discussions between your client and the tenants:-

[1] Nigel (client) to Alastair and Angela (tenants/prospective purchasers). "You have been super tenants for the past 15 years at 2 Queen’s Gardens. You have asked me whether you can purchase the property for £300,000 (even though its market value is £340,000) (there are no other factors re either you or me which I need to consider in deciding whether to accept your offer). After consideration, and solely because you have been super tenants, I am happy to allow you to purchase the property for £300,000, this effectively being my gift to you of £40,000 in recognition of your being super tenants. Are you happy to proceed on that basis ?"

Alistair and Angela to Nigel. "That is very kind of you, and we are pleased to purchase the property based upon that kindness”.

[2] Nigel to Alastair and Angela. "You have been super tenants for the past 15 years at 2 Queen’s Gardens, and I believe you now wish to purchase the property for £300,000. As you know, the real market value of the property is £340,000, but I understand that you have been unable to obtain finance on the basis of that market value. Of course, however, if I were to try to sell the property to another prospective buyer, this would result in my incurring Agent’s Fees of £X and I might still not achieve the market value on sale. In fact, I really need the cash urgently to enable me to reinvest the proceeds in another property nearby – consequently, however, for those two reasons, I am happy to sell the property to you for £300,000 – do you agree?”

Alistair and Angela to Nigel. "Yes, we agree to proceed on that basis".

If [1] applies, of course, then your clients should be happy to sign the “Gift of Equity” document (since self-evidently there is indeed such gift). If, however, [2] applies, then most certainly the “Gift of Equity” document should not be signed.

Of course, if the facts in your client's case may fall between [1] and [2], a judgment call may be necessary. You really need to ask the client to elaborate on the series of events (in terms of the discussions between the client and tenants) to obtain the full picture, and proceed from there.

As regards your quoting from the HMRC website, I would have to say that the advice therein is simply wrong, in view of its being too simplistic – if the property were sold “for less than it was worth to help the buyer”, and that was the only reason for the sale (ie effectively a gift to the buyer) then, and only then, would that guidance be correct.

It may be useful to consider the dictionary definition of “arm’s length” – one such definition is:-

“An expression which is commonly used to refer to transactions in which two or more unrelated and unaffiliated parties agree to do business, acting independently and in their self-interest”.

Frankly, it would be useful if you could indicate the approximate sale price and approximate “price reduction”, since those figures could in practice play a part in determining how much time one devotes to considering the position (and indeed, depending upon those figures, and if the actual sale price is used for the CGT calculation, an appropriate “white space” note may be advisable).

Basil

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Replying to fawltybasil2575:
By Ruddles
16th Feb 2024 12:00

The use of market value [per S.17(1)(a)] is required if the proposed transaction is (this is the crucial point) an arm’s length one.

Methinks there is something missing there.

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Replying to Ruddles:
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By fawltybasil2575
16th Feb 2024 19:40

Sorry, ma'am. Entering the rather important word "not", before the last 4 words of my last/only post, will correct my error.

Regards.

"Red-faced" Basil.

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David Ross
By davidross
17th Feb 2024 10:20

Thank you everyone for your contributions. Time to "answer the debate", I think.

What has been revealed is that my reaction that CGT can only apply on under-value (dinned into me by TO(HG) training some 48 years ago) is not 100% water-tight. We live and learn. I still think that HMRC is spoofing taxpayers into coughing up in all cases of under-value by the wording of its on-line declaration system.

I was aware of the previous debate on AW on a similar topic - thankfully this one did not stray so far into the weeds.

I have a practical problem - my client has been on the phone to HMRC so has alerted them to the matter - and it seems she would rather listen to HMRC kids than her accountant. I will try to persuade her that this is Self Assessment and it is not our job to take the worst view of our own circumstances - possibly we will (for the first time ever) make a comment in the white space, either inviting or heading off an enquiry. I would only do this to placate her, preferring to meet any enquiry IF it arose.

On our side is the connivance of the lender, which counted for the taxpayer in "Day and Anor".

Is this an arms length sale?
As contributors have said, this is the tricky question - if only it were as simple as whether the parties were connected. I will take the stance that my client has taken a lower price (and is incurring an early repayment penalty on the mortgage) because of other financial pressures on her.

If only I could argue that she is a fool! I think she should kick the tenants out and get a better price, but she is a nice person. No-one should be taxed on their good nature

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By taxdigital
17th Feb 2024 12:39

Whilst a bad bargain is nevertheless a bargain, what we get to see in this case is something different. I don’t see a bargain when this ‘soft-hearted’ seller and his tenant getting in to a transaction at undervalue for no reason. In a bargain each side tries to secure the best deal for themselves which means the parties to the transaction enter the transaction purely from a commercial perspective. What we can see here is a soft-hearted individual bringing in an emotional element to the equation and ending up (no idea if the tenant exploited it) giving away something which he has no business to be. That for me is a gratuitous benefit conferred on the other party and consequently my interpretation would that this is a disposal made ‘otherwise than by way of a bargain made at arm’s length’.

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Replying to taxdigital:
By Ruddles
17th Feb 2024 13:43

I return to the opening line of the original question. If the 5th (or 6th) word had been "decided" then, lack of information notwithstanding, that would sway me towards application of s17. However, "agreed" suggests to me that there was at least some negotiation. Without a full and accurate disclosure of what the various parties actually discussed I would not be prepared to offer an opinion one way or the other.

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Replying to Ruddles:
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By Tax Dragon
17th Feb 2024 14:43

The point being what is a bargain if not an agreement.

I mentioned we'd had a similar case. We thought the lender's approach (stating market value as sale price per the OP) risked extra SDLT. [Whole different thread... forget I mentioned it!]

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Replying to Tax Dragon:
By Ruddles
17th Feb 2024 15:33

Depends on how and at what stage the agreement/bargain is reached. In this context I make a clear distinction between unilaterally deciding to do something (which may or may not be accepted by the other party) and agreeing to do something after negotiation. With all shades of grey in between.

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David Ross
By davidross
18th Feb 2024 20:55

Can someone please answer in plain terms;

The discussion has got bogged down on Arms Length or not, but the question is how much CGT is payable!

If my client gets less than Market Value and is seen to give the balance away, but it is to a non-connected person, why should she pay CGT on the gifted amount? What is the twisted logic that says that?

In layman's terms, please.

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Replying to davidross:
By Ruddles
18th Feb 2024 21:24

Whether you consider it to be twisted logic or not, the language of TCGA 1992 s17 is clear.

You say that the discussion has become bogged down on arm’s length or not, but that is the fundamental issue!

If you want an answer in layman’s terms I would suggest that you first need to explain, in layman’s terms, exactly why she has “agreed” to sell the property for less than market value.

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Replying to davidross:
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By Tax Dragon
19th Feb 2024 06:38

OP, might I suggest you stop whining about the law and start advising your client? If you have now concluded that the tax will be based on MV, then tell her so. She might want to add the 'increase' in tax to the consideration charged, so that the purchasers in effect pay this twisted liability. She might not - her choice.

I presume she is also asking you about signing the gift of equity document. If that's not something you feel comfortable advising about, let her know so she can ask her lawyer. Maybe she should ask her lawyer anyway, it does sound like a legal matter.

Have you let her know about IHT? Advising on that might be outside your terms of engagement, but you probably ought to mention it.

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John Hextall
By John Hextall
19th Feb 2024 11:20

If you calculate the two options - CGT due at market value and CGT due at proposed sales value, the difference may be immaterial or it may suggest some further negotiation with the buyers is a good idea. The seller may get away with the lower price or they may not and have to argue further with HMRC, but it would be good to know how much is at stake. It might not be very much.

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By Justin Bryant
19th Feb 2024 12:12

To try close down this now very boring thread, you could just posit whether or not the sale would be a breach of trust (for being a deliberate sale at undervalue i.e. without any quid pro quo) if the property were held by trustees. See for example:

https://caselaw.nationalarchives.gov.uk/ewhc/ch/2024/291

The court will ask, “What would a reasonably prudent trustee have done in these circumstances?”

See para 89 here: https://www.supremecourt.uk/cases/docs/uksc-2022-0048-judgment.pdf

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Replying to Justin Bryant:
David Ross
By davidross
20th Feb 2024 08:49

Thanks - a brilliant suggestion

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David Ross
By davidross
20th Feb 2024 09:01

Here is my difficulty with TCGA 1992 s17;

It APPEARS to say that any gift (or discounted sale) even to a stranger is subject to CGT based on Market Value, and that is why I called it twisted logic - not whinging about the law, just questioning its true meaning and purpose.

Suppose I am a rich man and just take sympathy on a poor family so I give them a house which I have owned for some years, S17 seems to say that I must pay CGT on the 'transaction'.

Having just posed that question, I can see some logic - the gift would be potentially subject to IHT irrespective of the lack of relationship. In fact if I die quickly it might be taxed under both IHT and CGT

Thanks to Tax Dragon for the IHT insight - I am now clear what to advise my client - don't go near this transaction and don't sign the deed of gift.

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Replying to davidross:
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By Justin Bryant
20th Feb 2024 09:15

Your logic is totally twisted. Only gifts to registered charities etc. should be privileged with CGT relief for uncrystallised gains and not gifts to any old Joe.

You can't just wash-out uncrystallised gains with any old gift. Don't forget, the doneee gets MV uplift as a quid pro quo under s17.

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Replying to Justin Bryant:
By Ruddles
20th Feb 2024 09:42

The logic is not entirely twisted. Ignoring the fact that s17 says you (sometimes) must, what is the logic behind taxing someone on a gain that they never benefit from?

Of course, s17 is not just about countering the washing-out of uncrystallised gains ...

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Replying to Ruddles:
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By Justin Bryant
20th Feb 2024 10:00

Well, under Rangers, you can tax the salary of someone who never gets it can't you? There are other similar examples of being taxed on something you don't get, so your logic is just as twisted.

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Replying to Justin Bryant:
By Ruddles
20th Feb 2024 10:18

Not sure why you think my logic is twisted, as I'm not offering an opinion. Merely asking for your own view as to why you think it is logical to tax someone on disposal of an asset when they receive no benefit. "Just because it happens elsewhere" isn't much of an answer, but if it's the best that you can do, fair enough.

FWIW, I have no problem with the application of s17, especially since, as I said, it is not just about taxing unrealised gains.

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Replying to Ruddles:
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By Justin Bryant
20th Feb 2024 10:28

I already explained that above re gifts to charities etc. being the exception that proves the rule.

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Replying to Justin Bryant:
By Ruddles
20th Feb 2024 10:46

That doesn't explain anything, (in the sense that you haven't explained why you think a non-charitable gift should be subject to CGT when the donor receives no benefit).

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Replying to Ruddles:
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By Justin Bryant
20th Feb 2024 11:12

Well done on achieving circular twisted logic cubed. Impressive. Your talents are truly wasted here and should instead be employed in writing Government press releases re the P.O. scandal and 2019 LC scandal etc.

So you also think it's OK in principle to generate CGT losses with deliberate under-value sales (i.e. done wittingly without quid pro quo and not unwittingly) do you when there is so much anti-avoidance re such things?

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Replying to Justin Bryant:
By Ruddles
20th Feb 2024 11:18

Accusing others of having twisted logic. Priceless.

But I guess that if you don't want to explain why you think a non-charitable gift should be subject to CGT when the donor receives no benefit, no-one can force you to.

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Replying to Justin Bryant:
By Ruddles
20th Feb 2024 11:44

Justin Bryant wrote:

So you also think it's OK in principle to generate CGT losses with deliberate under-value sales (i.e. done wittingly without quid pro quo and not unwittingly) do you when there is so much anti-avoidance re such things?

And you accuse me of twisted logic. Priceless indeed.

I never said any such thing. In fact, I specifically said that I was happy with s17, hinting at in particular the countering of such losses.

The fact that you think that the above is what I said explains a great deal.

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By Tax Dragon
20th Feb 2024 10:52

There perhaps ought to be less restriction on holdover. Maybe it's not s17 that's twisted logic; maybe it's that there isn't an option (business assets aside) to defer the gain. (Though you maybe would need to deny PRR/some other reliefs if you derestricted holdover.)

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