Making best use of a Tax Planning opportunity in sad times

Q. My wife and I have just had some bad news – sadly I’ve been diagnosed with a terminal illness and am not expected to survive more than six months. My wife owns a commercial property which she bought in the early nineties for £300,000 but which is now worth around £2.0M. Is there anything you can suggest that could ease the tax burden if she were to sell it in the foreseeable future?

A. Sorry to hear of this sad news. I have given some thought to your situation and you and your wife might like to consider a bit of tax planning that could benefit her on a future sale.

Without proactive tax planning, she would continue holding the commercial property with a cost for Capital Gains Tax purposes of £300,000 and a sale before your demise would trigger a tax bill in the region of £340,000, i.e. £2.0M - £300,000 = £1.7M x 20%.

However, if your wife were able to refrain from selling now but were to gift the property to you, the gift would not attract any Capital Gains Tax as it would be effectively an exempt transfer between wife and husband. After your death and, assuming that you left the commercial property in your Will to her, your wife would inherit the property at its market value of £2.0M and would have no Capital Gains Tax liability on a later sale made by her for £2.0M. This assumes there is no further increase in the property’s value.

After inheriting the property, your wife could of course decide not to sell but could consider making a gift of the commercial property to your children. This would fall outside of her estate for Inheritance Tax purposes after seven years and could be a useful tax efficient way of passing on wealth to the next generation if a sale was not deemed to be essential.

As with all things tax, it does make sense to take proper advice, but the rewards and savings can be significant and worthwhile. This is a useful reminder that very effective tax planning can still be undertaken even at the saddest of times.