How do you dispute a will based on undue influence?
Inheritance tax (IHT) and Capital Gains Tax (CGT) share the handle of 'capital' taxes.
They have an uneasy relationship. They’re comfortable when doing their own thing; CGT a charge on capital profits, IHT a levy on the value in a deceased’s estate. But there are many occasions when they both come into play, giving both opportunities for effective planning and expensive traps for the unwary.
Lifetime giving by way of ‘potentially exempt transfer’, whereby the value given falls out of account for IHT purposes if you survive by seven years, is a standard IHT planning tool sanctioned by statute. For cash gifts, CGT isn’t an issue. But if assets or investments (stocks and shares, perhaps) are given, CGT will be payable on any increase in value since you acquired them. Where the value isn’t fixed (as with a property, perhaps) and has to be agreed with HMRC, one could find oneself having to find CGT of an unknown amount. Unlike a sale, where the tax can be paid out of the proceeds, CGT on a gift has to be paid out of your own pocket. Paying CGT now (at 20% - or 28% on a gift of a residential property) to save IHT later (albeit at 40 % on the full value, not just the gain) may not make financial sense.
On a death within seven years, the full value given will retrospectively be chargeable to IHT with no allowance for the CGT paid. And the CGT base value uplift to date of death will have been lost. A triple whammy, perhaps, though the value chargeable to IHT will be the value at the date of the gift and any increase in value since will escape IHT. While that increase may be chargeable to CGT in due course, remember that CGT is chargeable at lower rates, the timing of a disposal can be controlled and judicious use of annual exemptions made. Generally, it’s good IHT planning to make gifts of assets most likely to increase in value in the future.
If the asset given is your home, then there should be no CGT to pay because of the principal private residence exemption. But if you continue to live there, it’ll be a gift with a reservation liable to IHT on your death, and the recipient of the gift may find any increase in value chargeable to CGT when they sell.
A gift of the family home into the joint names of an adult child who lives with you shouldn’t fall foul of the reservation of benefit rule; but the rule will kick in if the child subsequently moves out (to get married ,perhaps). And when that child buys a place of their own, they may find themselves paying an additional 3% stamp duty, given they already have the share in the family home that you gave them.
Where assets are given to a trust, the gain can be ‘held over’ and CGT deferred until the trustees sell. But watch out for lifetime IHT at 20% on the excess of value given over the IHT nil rate band of £325,000. And if the asset given is a property, no principal private residence exemption will be available on a subsequent sale if a beneficiary of a trust is allowed to live there as his home, or to whom the trustees transfer the property. Statute denies the exemption in respect of a property previously the subject of a claim for CGT hold-over relief. Remember also that trusts carry potential income tax downsides.
After seven paragraphs of negatives, time for some positives. The UK’s taxation philosophy generally balks at charging two taxes at the same time. On death, where there’s an exposure to IHT, the CGT slate is wiped clean and the value of assets for CGT purposes is re-based (uplifted) to the date of death value. This applies even if the assets qualify for 100% relief from IHT (business or agricultural assets) or the estate is left, say, to a widow/widower or to a surviving civil partner, such that the IHT spouse exemption applies. Not only is no IHT payable but if assets are subsequently sold, CGT is calculated from the value at the date of death; increases in value from acquisition to the date of death will escape CGT completely.
In summary, remember two essential messages:
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