Tax rules have changed considerably over the years. In 1936 the House of Lords famously ruled that “Every man is entitled, if he can, to order his affairs so that the tax is less than it otherwise would be”. But in 2013 the General Anti-abuse rule was introduced. This has given HMRC the power to overturn any tax advantage from arrangements which can lead to abuse of the tax system.
As a result of the general anti-abuse rule some accountants are reluctant to take advantage of simple capital gains tax planning arrangements such as one spouse transferring assets to the other to make sure of extra exemptions and reliefs.
Catherine owns a flat which was her home before she married and moved in with her husband. She let the flat out for a year but now wants to sell it. It is worth £69,000 more than she paid for it. Up to £45,000 of the gain will be tax free due to the private residence relief. The sale occurs in 2019/20, of the remaining gain £12,000 will be covered by Catherine’s annual capital gain tax exemption with the remaining £12,000 chargeable to capital gains tax. But if she transfers 18% share of the property to her husband before the sale, roughly £12,000 of the gain would be taxable on her husband. He can now use his annual exemption and so reduced the overall tax on the gain to nil.
This sort of capital gain tax planning can be used for any gain, not just property.
The argument against such planning is that it meets the conditions for unfair avoidance set out in another famous House of Lords case.
PS Next week: Directors’ Loans and the importance of proper paperwork.