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Transfer 50% of the property to wife

Could HMRC argue this is tax avoidance

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I have a client who  is married and brought a property (sole owner) in 1985 as their main residence.  In 2010 brought another propertty which then became their main residence.

From 2010 to date the first property was being occupied by their Grandson rent free.  They now wish to sell the property to their grandson in a few months time. The client wishes to transfer 50% of this property to his wife to make use of the Capital Gains Allowance and the tax bands.

What would be better a declaration of trust or transfer the legal ownership ?  Could HMRC argue that the primary motive for the transfer was to avoid tax ?

 

Replies (33)

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By Matrix
23rd Jun 2021 17:24

I always thought this was aggressive but, according to a post yesterday, you would be remiss if you didn’t suggest it ;)

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Replying to Matrix:
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By David Ex
23rd Jun 2021 17:33

Matrix wrote:

I always thought this was aggressive but, according to a post yesterday, you would be remiss if you didn’t suggest it ;)

Think there might be a distinction between doing it now, well in advance of any sale being agreed (or, indeed, the property even being marketed) and doing it immediately before contracts are exchanged.

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By Matrix
23rd Jun 2021 18:33

They are selling it the grandson in a few months time.

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By David Ex
23rd Jun 2021 19:09

Matrix wrote:

They are selling it the grandson in a few months time.

Marketed not appropriate then - got carried away. Assume (always a danger) that this is still a plan rather then any firm commitment as it’s some months off.

Not sure what the anti avoidance issue is but if it’s “inserted steps” then do we have an ultimate sale with sufficient certainty to have a problem. I don’t know, just chucking some ideas in to aid (or not) Sanjay’s further research.

Worth a read:

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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By sanjay100
23rd Jun 2021 18:37

Yes I agree this is what I mentioned to the client to get the Declaration of Trust done at the earliest. There is 8K CGT savings having two Capital Tax Annual Allowances and utilising the Basic Rate Tax bands.

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By Duggimon
24th Jun 2021 09:42

The primary motive for the transfer is to avoid tax, so HMRC could certainly argue that, however I'm not sure that's necessarily enough for this to be considered tax evasion. It is the right of all individuals to arrange their affairs so as to minimise tax, per Duke of Westminster v Commissioners of Inland Revenue, so provided the wife participates in her due share of any proceeds and it's not purely artificial I doubt there'll be an issue.

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Replying to Duggimon:
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By The Dullard
24th Jun 2021 10:40

I agree. Whilst not quite the same situation, the naysayers may like to look at the standard death-bed planning example D19 in the GAAR examples, as to just how much you can do between spouses without upsetting HMRC's sensibilities.

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Replying to Duggimon:
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By kdbr
24th Jun 2021 12:51

So long as it's not conditional on the wife handing her share of proceeds over to the husband...

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By I'msorryIhaven'taclue
24th Jun 2021 11:25

So far as tax avoidance is concerned, might it carry any weight of argument that the wife would likely be entitled to lodge a "matrimonial homes right notice" with the Land Registry; certainly for the period 1985 to 2010?

In essence, and certainly in practice so far as separation & divorce cases are concerned, such action would effectively give her a legal entitlement to a share of the matrimonial home sale proceeds. An equitable ownership, without tax avoidance issues.

Which raises the question as to why filing form HR1 to register such an equitable interest should be without avoidance issues in the case of marital disharmony; but not so in the case of a continuing marriage where a spouse is simply protecting and receiving (and indeed being taxed upon) their share of the marital assets?

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
25th Jun 2021 10:37

I don't think so. A legal right to do something is not the same as doing it and the consequences of not having done it are surely not the same as the consequences of having done it.

For me, the key factors are that the transfer is of an interest in the property itself (and not merely of the proceeds of sale of the property, as would be the case for example if contracts for sale and purchase had already been exchanged) and - though I don't see the relevance of the Duke of Westminster case - Duggimon's comments about the wife subsequently participating in her due share of any proceeds and the arrangement not being purely artificial.

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Replying to Tax Dragon:
By Duggimon
25th Jun 2021 12:17

Tax Dragon wrote:

I don't think so. A legal right to do something is not the same as doing it and the consequences of not having done it are surely not the same as the consequences of having done it.

For me, the key factors are that the transfer is of an interest in the property itself (and not merely of the proceeds of sale of the property, as would be the case for example if contracts for sale and purchase had already been exchanged) and - though I don't see the relevance of the Duke of Westminster case - Duggimon's comments about the wife subsequently participating in her due share of any proceeds and the arrangement not being purely artificial.

One could argue, incorrectly, that the reason for the transfer of property and interest in property was done purely so as to minimise tax as, within a traditional marriage, it makes no difference to which spouse the income accrues, it is household income, the only purpose of the transfer would then be to reduce the tax payable on that income.

My reasons for invoking the Duke of Westminster were therefore twofold - to unnecessarily head off that potential argument (unnecessary as it's clearly rubbish) and simply for the joy of it because I love invoking the Duke of Westminster.

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Replying to Duggimon:
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By Tax Dragon
25th Jun 2021 12:42

That's Friday after-lunchtime logic.

Lucky I started early today. I guess you did too?

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Replying to Tax Dragon:
By Duggimon
28th Jun 2021 09:40

Tax Dragon wrote:

That's Friday after-lunchtime logic.

Lucky I started early today. I guess you did too?

Worse, I was working on an audit on Friday, it always sends me loopy.

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Replying to I'msorryIhaven'taclue:
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By Justin Bryant
25th Jun 2021 12:07

That's not quite right re such notices alone automatically giving an equitable proprietary interest in the relevant property. It's a statutory right to occupy the property. No more, no less.

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By I'msorryIhaven'taclue
25th Jun 2021 14:16

Ahha, thanks Justin.

So I guess the "charge" referred to in section eleven [of form HR1]: The applicant is entitled....to a charge on the legal estate... is more akin to a notice.

We should let Matty Stopcock know.

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Replying to Justin Bryant:
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By Justin Bryant
28th Jun 2021 12:17

It's of course different if the parties agree re BO per para 77 here: https://www.bailii.org/ew/cases/EWCA/Crim/2021/956.html

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Replying to Justin Bryant:
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By Justin Bryant
09th Jul 2021 12:08

Confirmed at para 33 here (the common intention BO point is also confirmed at para 34): https://www.bailii.org/ew/cases/EWHC/Ch/2021/1636.html

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By RayM55
28th Jun 2021 09:42

You should consult a qualified tax adviser since your client deserves best advice. I would not follow the comments below. HMRC is unlikely to query a transfer of this sort between spouses providing the spouse has full beneficial ownership of his/her share even if (within reason) the transfer is in advance of a sale.

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By I'msorryIhaven'taclue
28th Jun 2021 10:26

Could that be because the wife would in effect be converting the beneficial interest she has accrued over 35 years of marriage into a (full beneficial) legal ownership?

Not sure how cost effective investing in CIOT consultation fees might be. OP has estimated the tax saving at £8k; less the legal costs of transferring the property ownership or drawing up a declaration of trust; and less the tax consultant's fee.

So if we assumed outcome probabilities of let's suppose 50% x ((£8k minus tax consultant's fee) minus legal costs) PLUS 50% x (£0 minus tax consultant's fee) then the investment returns a poor expectation.

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
28th Jun 2021 10:40

I see you have tweaked your argument since 24th June. But my reply is the same: having a claim over something/having the right to go to court to be awarded something is not the same as having the thing itself.

Justin says it better.

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Replying to Tax Dragon:
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By I'msorryIhaven'taclue
28th Jun 2021 11:13

I thought I might get away with it - I had to tweak to get away from Form HR1, with which Justin torpedoed my argument. My bad for imagining a charge on that form related to a proprietary charge.

In the tweaked and I suppose simplified scenario, the wife still has a claim on the property (a beneficial interest); which claim she is exercising by converting it into a legal ownership. Akin to exercising an option, if you will allow me that analogy.

So, in summary, the legal right to do something and actually doing it meld together; and the consequences of not having done it are rendered irrelevant.

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Replying to I'msorryIhaven'taclue:
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By RayM55
28th Jun 2021 11:05

It’s nothing to do with CIOT fees since the CIOT does not charge fees and that point is somewhat irrelevant. The overall tax code in the UK exempts husband and wife transfers across all tax situations and there are specific rules to try to in effect recognise the economic reality of married couples and more recently those in civil partnerships.

Instead factor in the cost of it going wrong, HMRC getting upset and the consequent penalties if the tax paid is incorrect. Add to that the property may attract some main residence exemption and possibly some letting relief and there are issues to deal with.

There are some comments below that I agree with as to the everyday nature of this.

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By I'msorryIhaven'taclue
28th Jun 2021 11:31

RayM55 wrote:

The overall tax code in the UK exempts husband and wife transfers across all tax situations and there are specific rules to try to in effect recognise the economic reality of married couples and more recently those in civil partnerships.

Thanks for replying, Ray. Recognising the economic reality of a long-married couple is what I was driving at when I asked: "Could that be because the wife would in effect be converting the beneficial interest she has accrued over 35 years of marriage into a (full beneficial) legal ownership?"

RayM55 wrote:

It’s nothing to do with CIOT fees since the CIOT does not charge fees...

Ouch! Well obviously I was alluding to a CIOT member's fees. But if it's Queensbury Rules, the CIOT does in fact charge fees.

RayM55 wrote:

...and that point is somewhat irrelevant.

Spurious, some might say.

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Replying to I'msorryIhaven'taclue:
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By RayM55
28th Jun 2021 15:07

There is nothing spurious about it, your comment was inaccurate and with respect you know that.

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By I'msorryIhaven'taclue
28th Jun 2021 15:25

With respect, my comment may have been a tad sloppy; but its meaning was easily discernible.

If you insist on being an absolute stickler for a literal interpretation, then it was no more inaccurate than your subsequent contention that "the CIOT does not charge fees...". (The CIOT may not charge fees to the public, but it most certainly does charge fees.)

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Chris Caspell CTA TEP
By ccaspell
28th Jun 2021 10:40

I have been advising and assisting clients with this for many years without any problems. The process:

1. A simple two/three page trust document transferring the beneficial interest to the wife/husband (I have a template that I get the clients to complete and have witnessed)
2. Completion and filing of form 17 with HMRC (together with signed trust document)
3. HMRC write back confirming the transfer.

There really is no need to transfer the legal title.

In my experience, HMRC have never had a problem with this.

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Replying to ccaspell:
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By Justin Bryant
28th Jun 2021 11:01

Be careful. Unless you're a lawyer it's illegal under LSA 2007 to draft deeds over land. I'm not sure if a template counts, but it's not worth the risk as a lot can go wrong with templates (e.g. proper execution of a deed is not straight forward).

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Chris Caspell CTA TEP
By ccaspell
28th Jun 2021 11:26

I am not drafting the deed, just providing the template (without names/addresses etc) that the client completes entirely, which is not protected by the LSA.

I don't agree that the proper execution of a deed as simple as this isn't straight forward. I have done more than 40 of these over the years and every single one has been approved, in writing, by HMRC. In my view, and experience, the risk is tiny compared with the benefits that it affords the clients.

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By Justin Bryant
28th Jun 2021 12:05

Your reliance on HMRC to know what they're talking about re deeds is a bit misplaced.

There's a lot more that can go wrong e.g. backdating is illegal per para 66 of the case below. See para 35 for other DIY problems: https://www.bailii.org/ew/cases/EWCA/Crim/2021/956.html

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By Tax Dragon
28th Jun 2021 11:59

I believe it's a matter of criminal (not tax) law. Unless ccaspell wants HMRC to ask every time whether the deeds were legally made, I don't see why their 'approval' should mean anything.

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By ccaspell
28th Jun 2021 15:04

You're quite correct, my use of the word 'approval' was misplaced - I should have said 'accept' as that is what I need them to do - specifically the form 17 submission.

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By ccaspell
28th Jun 2021 15:01

I don't really need HMRC to know what they are talking about, I simply need them to accept the filed form 17. The trust deed is simply there to evidence the fact that there is an unequal split of the beneficial interest in the property as required by form 17.

I agree that backdating is illegal, but surely that's my job to check that everything is in order before sending it to HMRC. Form 17 states that it needs to be submitted within 60 days of the declaration, so I don't think that backdating is, in most cases, going to be an issue...or at least it is never something that I have had to consider in practice.

There are lots and lots of things in tax (and law) that are complex, subtle and bamboozling - I accept that - however, in this case, I really think that it is one of the simpler bits of advice that I give to clients.

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By Rgab1947
28th Jun 2021 15:09

I find many solicitors use template forms/contracts.

The legal profession loves closed shops. Protects their rice bowl.

Other countries have opened up much of the mundane jobs to accountants and the like.

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