As the rather strange old saying has it, there’s more than one way to skin a cat. There are also all kinds of reasons why a person might want to transfer assets to someone else: and very often, as we will see, there’s a choice between methods of achieving this transfer, some of which trigger large tax liabilities, and some of which don’t.
Below is an excerpt from our best-selling tax report Asset Transfers: Hidden Tax Traps and Treasures which takes a look at the popular method of Asset Protection.
Asset protection
Moving on to our second common reason why people transfer assets to others, we need to start by entering a caveat. If an individual or company runs their financial ship onto the rocks, there may be situations where transfers for asset protection purposes work and others where they don’t.
The law looks askance at people getting rid of everything they have before a bankruptcy order is made against them, and there are powers in some cases for such transfers to be overridden and reversed. That’s an extreme example, but we need to make the point, here, that this is largely a report about how to make tax-efficient asset transfers and it isn’t a treatise on asset protection as such. For that, you will need to seek out other experts!
Out of harm’s way
Greg is the founder and editor of a satirical magazine which specialises in attacking the rich and powerful. He always has to bear in mind the libel laws, and is very careful, of course, to take appropriate legal advice and – mostly – checks carefully to see that the scurrilous articles he prints are factually true. But he’s very conscious that, in these litigious days, he’s playing with fire.
So, first of all, as a kind of ‘insurance policy’, he transfers the ownership of his home 100% into the name of his wife. This is obviously a tax-efficient asset transfer because both the transfer itself, and any future sale of the property, will be exempt from capital gains tax as a main residence. He also has shares in his brother’s company, which manufactures flat pack furniture. This would be very awkward indeed to deal with in the event that a major claim resulted in Greg’s bankruptcy. Fortunately, though, he is able to transfer these shares, either to his wife or to any other closely related family member, without the transfer triggering CGT. This is because the shares in the company, even if given to someone who isn’t a spouse, will qualify as a ‘business asset’, and as a result, CGT ‘holdover relief’ will be available – providing both he and the donee sign an election to that effect.
Finally, he has a joint interest in a buy to let property worth £700,000, with his sister. Unfortunately, his sister and his wife don’t get on at all, and he’s reluctant to make them joint owners of anything, let alone a valuable property.
Fortunately, though, the property can be put in trust, perhaps with the sister and her husband as the trustees, and the capital gain can again be ‘held over’, even though a buy to let property doesn’t qualify as a business asset. Transfers into trust qualify for holdover relief, as we’ve seen, and half of a property worth £700,000 would probably be valued by HMRC at no more than about £300,000 – due to the discounting effect which joint ownership gives rise to. Hence, no inheritance tax will arise on the transfer to trust either.
To delve deeper into the area of Asset Transfers get the full report here:
