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Would anti-avoidance bite here?

Would anti-avoidance bite here?

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Husband is a higher rate taxpayer.  Wife is a basic rate taxpayer.
Husband currently owns a 22 year old investment in a life insurance bond, pregnant with a gain the realisation of which would be chargeable to Income Tax.
As he is already a higher rate taxpayer, top slicing relief would provide no benefit to him.

He proposes to assign the investment to his wife for no consideration.  At some future date the wife will surrender the policy and claim top slicing relief by reference to her tax rate bands.

My questions:

1) *IF* not caught by anti-avoidance legislation, does the proposal "work"?  Ie confirm that the assignment to spouse is not itself a chargeable event, and spouse then takes on the entire history including 22 year top slicing.

2) Would the spouse exemption contained in IT(ToI)A 2005 s.626(1)-(3) apply?  In particular, is the investment "wholly or substantially a right to income"?  Sure, the surrender is TAXED as income, purely by reason of specific statutory intervention, but in all legal respects the gain is "capital".

3) If not caught by S.624 IT(ToI)A, would it be caught by FA 2013, part 5 / Sch 43 (general anti-abuse rule)?

Thanks

With kind regards

Clint Westwood

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By Dick Stastey
12th Apr 2017 12:48

My suspicion would be that it is the law that will defeat you here.

When you say that the investment will be "assigned" to the wife, exactly how will that be effected legally.

I suspect that the only way to put the husband in the position whereby Condition A, in ITTOIA 2005, s 465, is satisfied in relation to the wife, rather than him, will cause condition B to be satisfied in relation to him.

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By nogammonsinanundoubledgame
12th Apr 2017 13:32

To be honest it never occurred to me that there might be a legal impediment to transferring beneficial ownership (irrespective of the tax consequences).

Indeed I personally own an insurance bond that was originally invested by my Dad. It came my way by way of a trust rather than direct by him, but I would be surprised if that makes a difference to the mechanics.

You put "assigned" in quotes. If I have used some term with technical implications that reach beyond the common English language useage then my apologies. Assigned, gifted, conveyed, whatever. One day it is his, next day it is hers, and no consideration passes for the exchange.

With kind regards

Clint Westwood

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Replying to nogammonsinanundoubledgame:
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By Dick Stastey
12th Apr 2017 13:42

I think if you look at s 465 you might understand my point better.

I am not sure you can assign the policy. As you say, the usual process is to make somebody else the beneficiary by way of a (possibly bare) trust arrangement. In doing so you are caught by the mechanics of s 465, rather than any anti-avoidance provision.

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By nogammonsinanundoubledgame
12th Apr 2017 14:06

OK I think I may be getting there. In my personal case I was the beneficiary of the trust in whose name the investment was held. So when the investment was conveyed to me personally by the trustees there was no change in beneficial ownership. I suspect that this was the reason why no CEG arose on that event. But that would not apply in the OP case. Is that it?

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By Dick Stastey
12th Apr 2017 14:17

Have you still not read s. 465?

I am suggesting that the only way legally that the husband can make the wife beneficially entitled to the payouts (I may be wrong - take legal advice) is for the husband to continue to hold the legal interest for the benefit of his wife (ie on trust).

If that is correct, then condition B in s. 465 is satisfied with respect to the husband, meaning that he can still be taxed on the gains.

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By nogammonsinanundoubledgame
12th Apr 2017 18:08

I have read it and am quite willing to accept that I am being particularly dense. It may be helpful if you were to point out what is the distinction between the OP case and my personal experience whereby, in the latter case, I have successfully had a bond transferred to me, without there being any CEG chargeable on trustees, but in the former case you say that this sequence is not possible.

My reading of s.465 is that it while it defines individuals who are liable to the charge, it makes NO COMMENT on whether the beneficial entitlement can v cannot be transferred from one individual to another as a matter of law.

Provided that beneficial entitlement is capable of transfer, then at the time of encashment, condition A would be satisfied in respect of the spouse but not the originator/husband, suggestive that the objective of the exercise is met (unless other anti-avoidance kicks in to override it).

s.484(1)(a)(ii) recognises the possibility that the rights to a policy can be assigned (yup, even uses the term "assigned") as being an occasion of potential charge. In that section it refers to assignment for value, the implication being if there is no value in consideration s.484(1)(a)(ii) does not apply and the assignment falls without CEG.

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By Dick Stastey
02nd May 2017 10:59

I agree (and have already agreed) that condition A is satisfied with respect to the wife.

However, on the assumption that legal ownership cannot be transferred, the husband remains an individual that has created a non-charitable trust (in favour of the wife) on which those rights are held, with the effect that the husband remains a person liable to the charge.

So when the CEG is realised on surrender, HMRC are able to tax the gain on either the husband or the wife; both being liable.

I would agree that if the legal (rather than the beneficial) rights can be assigned, then the above does not apply.

However, my point is that maybe it is not the legal rights, but the beneficial rights that are being assigned, If it is only the beneficial rights (which I suspect to be the case), then the person with the legal entitlement to the rights must hold them on trust; a non-charitable trust, which they created.

I am not saying that I am correct. What I am saying is that the tax analysis can only accurately be deduced if one knows the legal mechanics of assignment of a life assurance bond - ie is legal entitlement assigned, or does the assignor hold that entitlement on trust for the assignee as a result of the assignment. If the latter applies, then the husband will remain within condition B of s 465, meaning he remains a person liable. Note that it is not "the" person liable, but "a" person liable ("an individual is liable..."). So there is then still a risk that the CEG could still be taxed on the husband.

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By Tax Dragon
28th Apr 2017 18:41

I think this (1) "works": S487 means you ignore the assignment for CEG purposes. As for (2), the settlements legislation, I agree it is not a gift of income. (3) is beyond my ken, but (unless there's more you're not saying), there's nothing convoluted or artificial here and giving outright gifts to your spouse or civil partner should not be seen as abusive.

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By Dick Stastey
02nd May 2017 10:59

I agree that there is no CEG on assignment, and that neither the settlements legislation nor the GAAR can be applied incidentally. My concern is wholly with respect to the application of condition B in s 465 to the husband.

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By Tax Dragon
02nd May 2017 12:18

I confess I had expected there to be a provision that looked through bare trustees/nominees (à la s666 in ITA) – but I’m not immediately seeing it. If there isn’t a (general or specific) rule to that effect, you have a point.

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By Tax Dragon
02nd May 2017 12:23

Does s469 shed any light?

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