Key Post Wife inheriting shares with capital gains

[Gordon Gekko]

General anti avoidance legislation is very prescriptive with tests and thresholds which need to be met. It’s what was invoked in the circa €100m Schroder synthesised bond transactions Appeal a few years ago. It’s the ‘misuse’ part that’s one of the key elements. Put simply, in the context of this discussion, there’s no CGT on death, so spouses moving assets to a dying spouse is using the relief or abatement for what it’s there for.

To try and illustrate it by way of an far fetched example, Section 811 general anti avoidance would only apply if some clever tax adviser found a technical way to make the CGT rules on death apply to companies or pets or something equally as silly.

 

[Brendan Burgess]

general anti avoidance would only apply if some clever tax adviser found a technical way to make the CGT rules on death apply to companies or pets or something equally as silly.

Great example. I did not think it was being used for hounding widows.

 

[T McGibney]

there’s no CGT on death, so spouses moving assets to a dying spouse is using the relief or abatement for what it’s there for.

It wouldn't make sense in the absence of a tax advantage to transfer any asset to a dying spouse.

I think you'd be foolish going to the Tax Appeal Commission trying to argue that your client is a widow who shouldn't be hounded by the Revenue.

 

[Gordon Gekko]

It wouldn't make sense in the absence of a tax advantage to transfer any asset to a dying spouse.

I think you'd be foolish going to the Tax Appeal Commission trying to argue that your client is a widow who shouldn't be hounded by the Revenue.

It would never make it to a Tax Appeal because Revenue would never raise an assessment because it’s not a general tax avoidance transaction.

You do know that there are detailed tests and steps in Section 811? Genuine question, and I’m not having a go, have you ever handled a Section 811 case?

 

[T McGibney]

I’m guessing that never happened, because in that example it wouldn’t be a ‘misuse or abuse’ of the interspousal exemptions. It would be nonsense, and laughed out of an Appeal Hearing.

Your latter point here is capable of being read in different ways. Can you rephrase it please?

 

[Duke of Marmalade]

Hi Tommy

It's not really your definition or Gordon's definition.

It is what sort of transactions which spur Revenue to invoke the legislation.

I very much doubt that they would pursue a widow because she transferred €300k worth of assets to her dying husband and saved €100k CGT.

They might do it if it were a transaction of €100m.

Brendan

Hmmm! Making a call as to whether Revenue will catch you. I think this arises a lot with CAT. I have heard third hand of advisors saying "look the chances of Revenue chasing down this gift for a deposit in say 20 years' time is remote". This is a bit of an ethical conundrum. Presuming they are right shouldn't they advise their clients of that reality, albeit leaving it to their own (or indeed their dependants') conscience whether they declare it.

 

[Brendan Burgess]

Hi Duke

Just to be clear I am not recommending illegal tax evasion. It is wrong whether the chances of being caught are low or high.

This seems to be a full legitimate tax planning activity. I am just pointing out that even if Revenue knows about it they are very unlikely to take any action.

The anti-avoidance legislation is for other purposes as discussed here

Has anyone any experience of Section 811 anti-avoidance legislation?

This has come up a few times on Askaboutmoney where what appears to be reasonable tax planning is questioned on the grounds that Revenue has wide powers under Section 811 to express an opinion that the transaction is artificial. This example triggered this post. I can't find much online about...

www.askaboutmoney.com

 

[Gordon Gekko]

Hmmm! Making a call as to whether Revenue will catch you. I think this arises a lot with CAT. I have heard third hand of advisors saying "look the chances of Revenue chasing down this gift for a deposit in say 20 years' time is remote". This is a bit of an ethical conundrum. Presuming they are right shouldn't they advise their clients of that reality, albeit leaving it to their own (or indeed their dependants') conscience whether they declare it.

That’s dishonest tax evasion though, so totally different, and not really a conundrum at all.

 

[Duke of Marmalade]

I very much doubt that they would pursue a widow because she transferred €300k worth of assets to her dying husband and saved €100k CGT.

They might do it if it were a transaction of €100m.

So you are saying that the Revenue have a call on what is tax evasion and can be influenced in that call by the personal circumstances of the taxpayer?

 

[Brendan Burgess]

Not at all.

Tax evasion is a criminal offence.

Tax planning is perfectly legal.

Aggressive tax planning might fall foul of Section 811 but I don't think it's classified as tax evasion.

Brendan

 

[torblednam]

@Gordon Gekko is 100% correct here - this is all about the distinction between tax planning and tax avoidance; the first entails taking steps to secure the benefit of reliefs / exemptions as they're intended to apply, and the other involves artificial, highly contrived series of steps / transactions to obtain the benefits of reliefs/exemptions in a way that constitutes a misuse or abuse of the relief, having regard to the purpose of the relief.

What was being described here is simply tax planning - there's nothing artificial or abusive about transferring an asset to a spouse to secure a more favourable tax treatment.

 

[torblednam]

I always thought that the Revenue could do nothing about tax avoidance but tax evasion was a different story. Depending on your advices - for I do respect you! - I may have to revisit this belief!!

If, someone performed the highly contrived series of steps as you've described, the implication of your posts is that this is tax avoidance and that the Revenue could do something about it! It follows that tax evasion is never ok and tax avoidance may or may not be ok! Have I got this right?!

I think you need to reread the entire thread!

Tax planning is fine - this means structuring your affairs in order to minimize your tax exposure, or maximize the utilization of reliefs, or in this case transferring assets to the spouse that is expected to die first (although anyone can be struck down at anytime, nobody knows when their number will be up).

There's a spectrum, with things like maxing out your pension contributions, or gifting your kids 3k a year, at the benign end of the spectrum.

At the other end of the planning spectrum is highly aggressive planning, or tax avoidance, which involves elaborate schemes designed purely to engineer a desirable tax outcome through obtaining a relief or exemption in a way that the people passing the legislation would not have intended or foreseen. Such actions aren't illegal, as they adhere to the letter of the law, but are contrary to the spirit of the law. That is why there are both specific anti-avoidance provisions and general anti-avoidance provisions, to allow Revenue to counter aggressive schemes to avoid tax.

 

[Duke of Marmalade]

...are contrary to the spirit of the law.

Example: sharing investment income for the purpose of availing of McCreevy's individualisation scheme which was motivated at making the treatment of joint earned income fairer.

 

[Gordon Gekko]

Example: sharing investment income for the purpose of availing of McCreevy's individualisation scheme which was motivated at making the treatment of joint earned income fairer.

No.

 

[Duke of Marmalade]

No.

It was of course the constitutionally offensive situation by which two teachers married to each other had a worse tax situation versus a similar couple who didn't bother getting tying the knot.
Very controversial at the time but the strongest argument in support was that two working people had considerably more expenses than a stay at home wife/husband.
Those few couples who were actually living off investment income slipped through unnoticed and had an unintended* bonus if they so arranged their investment income to avail of individualisation.
I do not condemn them at all for doing so. If that's the letter of the law then avail of it for sure.

*unintended as in "against the spirit" but of course the department would have been aware of this unintended consequence but it would be very messy to avoid and anyway it would hardly lead to riots.

 

[torblednam]

Example: sharing investment income for the purpose of availing of McCreevy's individualisation scheme which was motivated at making the treatment of joint earned income fairer.

Apologies if I'm missing something (I am young enough that I wasn't in the workforce before the current status quo!), but it seems to me that you may be conflating the underlying motivation for the change, with the clear effect of the legislation that was enacted.

My understanding (from a quick Google,) is that the motivation was to encourage greater workforce participation. If they had intended or desired only to bring earned income within the scheme they could have done so, but that's not what was done. The implications of that will have been very clear.

 

[Duke of Marmalade]

My understanding (from a quick Google,) is that the motivation was to encourage greater workforce participation.

"greater workforce participation" or "earned income", call it what you like; reducing the tax burden on married couples living off investment income was not part of the script - or as you put it "within the spirit".
The whole thing was an "Irish solution to an Irish problem". The main objective was to be compatible with Dev's Bunracht by not discriminating against couples who were married versus just living together. So the ruse was to discriminate against couples with a stay at home partner - the argument being "hey, we are not discriminating against you for being married but for living like Dev intended you to, get on yer bike woman". Of course this naturally led to the whitewash justification of "greater workforce participation".

Anyway, back on topic. Consider the situation of the Dev family: "breadwinner/stay at home partner". In a situation where the breadwinner earned all the money and they lived off her investment income Charlie gave a welcome but unintended bonus by allowing them double the standard rate cut-off, if they so fiddled the ownership of those assets.
Not so for the household living off the breadwinner's pension.
But fair play to advisors who draw their clients' attention to this unintended anomaly.

 

[Obairchrua]

Just to check for understanding of this topic, say, purely hypothetically...

Husband has €500k worth of shares which were acquired for €100k leaving a CGT exposure on the difference of €400k if sold now.
Spouse has €500k worth of shares which were acquired for €100k leaving a CGT exposure on the difference of €400k if sold now.
They have no plans to sell these as they are otherwise very comfortable financially and have no known illnesses or plans of imminent demise.

As per Revenue guidelines and my understanding of reading this thread "If you are living with your spouse or civil partner and you transfer an asset to them, you will not have to pay Capital Gains Tax (CGT). Your partner will not have to pay Capital Acquisitions Tax (CAT) on the transfer, as it is treated as a gift.

For whatever reason they now decide to gift each others shares to the other thus disappearing all CGT liabilities to date and without CAT liability.

They then decide to sell all shares for current acquisition cost and value of €500k each.

Is my understanding that they will now net €1m avoiding all tax liability on these shares correct?

 

[Brendan Burgess]

They then decide to sell all shares for current acquisition cost and value of €500k each.

No.

While there is no CGT now, the acquisition cost for the wife will be the cost her husband acquired the shares at.

The point of this thread is that gains disappear on death. So if the husband is dying, the wife should transfer all her shares with unrealised capital gains to him and they will disappear. Her acquisition cost will be the probate value.

Brendan

 

[Obairchrua]

No.

While there is no CGT now, the acquisition cost for the wife will be the cost her husband acquired the shares at.

The point of this thread is that gains disappear on death. So if the husband is dying, the wife should transfer all her shares with unrealised capital gains to him and they will disappear. Her acquisition cost will be the probate value.

Brendan

Ah, yes of course. Thanks for clarification Brendan