Wife inheriting shares with capital gains

[Brendan Burgess]

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.

Such actions aren't illegal, as they adhere to the letter of the law, but are contrary to the spirit of the law.

So if I come up with an outlandish, but legal, scheme and Revenue challenges it, and I lose any appeal I can make, what are the implications for me?

It's not a criminal offence like tax evasion.
But do I face interest and penalties?

Brendan

 

[ClubMan]

I always thought that the Revenue could do nothing about tax avoidance

Tax avoidance

Description of what tax avoidance is and how it is dealt with

www.revenue.ie

 

[torblednam]

@Brendan Burgess It's a bit complicated, depending on when a transaction was undertaken etc, but in general terms Section 811D provides for a Tax Avoidance Surcharge of up to 30%.

Statutory interest applies as usual.

 

[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

 

[torblednam]

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.

I don't understand the connotation of people "fiddling with the ownership" of assets - spouses are entitled to transfer assets between them tax free, it has always been the case AFAIK?

There is no "fiddle" in transferring the beneficial ownership of an asset from one spouse to another - it then belongs to them and if they decide to up and leave, it'll continue to be their asset and their income until a formal divvying out of the assets is done.

 

[Duke of Marmalade]

There is no "fiddle" in transferring the beneficial ownership of an asset from one spouse to another - it then belongs to them and if they decide to up and leave, it'll continue to be their asset and their income until a formal divvying out of the assets is done.

Oh dear! Picking on my terminology.
I will excuse you that you weren't around when Charlie introduced his individualisation but, trust me, giving married couples living off investment income a tax break was an unintended outcome.
It could have been prevented, of course, by making unearned income taxable at marginal rate but that would have been a massive and unintended change in the tax system.
Yet they didn't allow switching of ownership of pensions between spouses.

 

[JimmyB99]

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.

That has always been my understanding @Brendan Burgess. However, for completion, should it not be recorded, that an experienced practising accountant believes that there may be ramifications for doing this?

 

[Brendan Burgess]

However, for completion, should it not be recorded, that an experienced practising accountant believes that there may be ramifications for doing this?

No, because it was not relevant to the specific question asked.

And it has been thrashed out extensively already.

 

[JimmyB99]

No, because it was not relevant to the specific question asked.

I disagree - this was the essence of the debate in my opinion!

 

[Gordon Gekko]

Oh dear! Picking on my terminology.
I will excuse you that you weren't around when Charlie introduced his individualisation but, trust me, giving married couples living off investment income a tax break was an unintended outcome.
It could have been prevented, of course, by making unearned income taxable at marginal rate but that would have been a massive and unintended change in the tax system.
Yet they didn't allow switching of ownership of pensions between spouses.

Wasn’t individualisation more of a bad thing for married couples? My understanding is that, crudely, if the Standard Rate Cut Off Point was £25,000, a husband would have had a SRCOP of £50,000 because his wife was a stay at home Mum. Then McCreevy changed it. But if they were living off investment income, they could move the assets? So they ended up no better off, but importantly no worse off?

 

[Brendan Burgess]

They have no plans to sell these as they are otherwise very comfortable financially and have no known illnesses or plans of imminent demise.

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.

I disagree - this was the essence of the debate in my opinion!

He was asking about two people in good health who sell their shares to each other and then sell them on the open market. I have fully explained the ramifications of doing this and no one disagrees with what I have said.

Brendan

 

[Duke of Marmalade]

Wasn’t individualisation more of a bad thing for married couples? My understanding is that, crudely, if the Standard Rate Cut Off Point was £25,000, a husband would have had a SRCOP of £50,000 because his wife was a stay at home Mum. Then McCreevy changed it. But if they were living off investment income, they could move the assets? So they ended up no better off, but importantly no worse off?

I forget the details. Married couples had less than twice the single person's SRCOP to reflect the economies of living together. Or indeed looking at it another way a taxpayer got an increased SRCOP to reflect the increased expenses, but not twice the individual SRCOP. This was ruled anti Dev as an unmarried couple could claim two individual SRCOPs. This was ended. It was a quite significant shift in taxation in favour of double income married couples. Married one earner couples and singles would be funding this big change in taxation. The double income married couples enjoyed an immediate windfall, the hit to other taxpayers was probably phased in over a number of years. My point is that the "spirit" of the change would not have included married couples living off investment income, but practically impossible to avoid.

 

[torblednam]

I forget the details. Married couples had less than twice the single person's SRCOP to reflect the economies of living together. This was ruled anti Dev as an unmarried couple could claim two individual SRCOPs. This was ended. It was a quite significant shift in taxation in favour of double income married couples. Married one earner couples and singles would be funding this big change in taxation. The double income married couples enjoyed an immediate windfall, the hit to other taxpayers was probably phased in over a number of years. My point is that the "spirit" of the change would not have included married couples living off investment income, but practically impossible to avoid.

I still don't see a point in what you're saying - if they didn't specifically legislate in such a way as to make it only apply to earned income, then it obviously applied to all income. It's not like some kind of eye-of-a-needle loophole through ill considered drafting; it's simply what was enacted..

Straightforward inter spousal transfers undertaken to capitalize on that new status quo are clearly in the realm of reasonable tax planning and not at all aggressive / abusive.

Insofar as you have mentioned the "spirit" of the legislation a couple of times, I think you may be misunderstanding how the "purpose" bit of the AA provisions is applied by the courts - in the first instance, recourse is had to the plain wording of the relevant provisions, read in their context. If the legislation plainly says all income, then it was and is intended to apply to all income, whether or not you believe that to have been Charlie McCreevy's intention or not.