The Gazette 1979

MARCH 1979

GAZETTE

The Wife or Surviving Spouse 1. The first danger is contained in the anti-avoidance provisions of the Act. These are designed to prevent tax avoidance by gift splitting. For a period of three years after a wife receives a gift from her husband any inter vivos transfer or gift of the property to a child is deemed to be a gift to that child from his father and will therefore be aggregated with any benefit that that child has already received. Effectively, therefore, a wife must survive three years from the date of a gift before she can dispose of it by gift to a child in such a way that he will enjoy the full threshold both from his father and mother. It is obviously important that as soon as a wife receives a gift she must make a suitable will. Otherwise two-thirds of her property would revert on her death to her husband on intestacy or might go in an unintended direction under an earlier will. In the circumstances that we are considering she will, if she has not already made an inter vivos gift to her son, obviously devise her share in the farm to the son intended to receive same. But it remains certain that there is no chance of achieving the double threshold for a child, unless the husband vests portion of the property in his wife, even if some risks have to be run for the three year period. Incidentally, any risk arising for such a short period might be economic to insure in the case of younger couples. (2) Capital Gains Tax This does not arise in the case of wills or inheritances because a person acquiring the assets of a deceased person is deemed to acquire them for a consideration equal to their market value at the date of death. A transfer or settlement of land, however, does constitute a disposal of assets for the purpose of Capital Gains Tax — even a transfer to a wife or son. In most cases liability is not likely to arise because relief will be enjoyed under one or other of the following provisions: (a) If the property has been in the ownership of the person making the gift or of the spouse of the owner for a period of 21 years there is not tax (assuming the lands have no development value). (b) A person aged 55 years may dispose of all or any of his qualifying business assets such as farmland stock and equipment to a child without liability for Capital Gains Tax. This only applies to qualifying assets, however, i.e. assets owned for a period of not less than 10 years. (c) A transfer by á husband to a wife or a wife to a husband is treated as a disposal for a consideration of such an amount as secures neither a gain or a loss. (Section 13 (5).) This Section does not apply to an asset that forms part of trading stock of a trade carried on by the person making the disposal or if the asset is acquired as a trading stock for the purpose of a trade carried on by the person acquiring the asset. For definitions of trade and trading stock see Section 52 of the Income Tax Act 1967. It would seem to follow that where a person inherits property say, on the death of his father, and settles it without delay thereafter there would be no material liability to Capital Gains Tax because he would be deemed to have acquired it for market value at the date of death. 33

(provided that she keeps within the limits of a "genuine" farmer). 2. That the remainder of his property comprises a Trust Fund for the education, maintenance and advancement of his children with power to his wife to appoint the property to his children as she shall decide and in default of such appointment to the children equally. On his death there is no liability to Inheritance Tax. Seven or eight years later his wife divides the farm between her two sons (having made appropriate provision for her two daughters) using her power of appointment and through a Deed or Will makes over the share she inherited under her husband's will; there is no liability. If she makes over the entire farm to one son, however, (subject to suitable provisions for the three children) there will be a liability; at this stage, however, a half a million pounds worth of assets will have been vested in one son without liability; the liability is confined to the surplus over that, i.e. £100,000.00 less the value of benefits to the other children — a liability of perhaps £25,000.00 or less. This contrasts very favourably with all the other examples; apart from saving substantial tax this man has probably disposed of his property in the way he desires. It is possible to work a lot of permutations on this basic example which, depending on the assets and circumstances will save Inheritance Tax entirely or at least make a very substantial saving. If the family are grown up with one son working on the farm and the other three children "done for" it may be possible to eliminate the complications of trusts and powers of appointment. For example a tenancy in common could be created in the farm by transferring a 5/12th share to his wife, a further 5/12th share to his son and retaining a 2/12th share. I have taken these figures because the 5/12th share is worth £250,000 or equal to the threshold and the transfer of these shares does not create any liability to Inheritance Tax. The wife can then will her 5/12th share (It is suggested that there is not need to wait the three years) to her son and this in turn will avoid Inheritance Tax. The son will ultimately have to pay Inheritance Tax on the remaining 2/12ths share, assuming this is willed or transferred to him at approximately the same level as in example 4 — say about £25,000.00. Before this happens, however, there is the hope that thresholds may be increased and conversely the risk that inflation may increase the liability. If the wife acquires the property under her husband's will she can make an inter vivos gift to her son and this will not, even if it is made immediately, be treated either a s a gift or an inheritance from the father. The "three- year rule" whereby a gift from B to C, if made within three years of a gift from A to B is treated as a gift from A fo C only applies where both transactions are gifts. If one is an inheritance the rule does not apply. It will be observed that there is one common denominator in these examples and that is that it is essential to pass a share up to the threshold of £250,000.00 through the wife. This obviously makes it desirable to ensure that the wife gets her share — a certainty that can only be achieved by a transfer because under a will there is always the risk that she will predecease. It may well look very simple from these examples but there are some dangers, risks and pitfalls that have to be watched.