Inherited assets by spouse at what cost

[Kiran]

Your help needed in respect of gains made by a spouse on inherited property.
I understand that if a gift is made during life time between spouses, the receiving spouse takes it at its original cost. However, I am confused about the “cost” of any inherited assets when sold by surviving spouse.

Wife passed away leaving her share of the couple’s let property purchased jointly to husband. Substantial gain is due on sale of this house. The house was purchased in 2008 for £250,000 now the value is £400,000. No PPR relief is due. The probate valuation in 2015 of the house was say £380,000 at the date of death.
In the capital gain calculation: husband’s cost is 125,000 – his original half share of purchase price plus the other half share inherited at probate value £190000. Thus gain is £400000 less 315000 (125k plus 190k)= £85000? Or should the cost be £250,000 (own share £125000 and wife’s original cost £125000) ignoring probate value ?
Then his gain is 400000 less 250000= £ 150,000! Please advise.

[pawncob]

You get the benefit of the uplift in value on death, so the gain is £85000.

[FigNewton]

I'd been wondering exactly the same and have now discussed it on the phone with a HMRC CGT expert. He verified the answer above. I am surprised because this answer seems almost too good to be true. It means that if I have owned a BTL property solely since 1990, and die before my wife, then a huge amount of potential CGT liability will be instantly wiped out.

This poses also a tricky puzzle. Should a married couple split ownership of a share portfolio between them so as to benefit from two sets of £5,000 tax free dividend allowances per annum, or should the entire portfolio be held in the ownership of the spouse who is most likely to die first, so the surviving spouse can benefit from the maximum step-up in basis and pay minimal future CGT? Or indeed, perhaps when one spouse is on his deathbed, his some-to-be widow should gift all her assets to him during his last week's of life?

Am I understanding this correctly? It looks as if there would be great potential for abuse (e.g. A and B are just friends, but marry so that A's assets, which contain huge pregnant gains, can be gifted to B who is sadly about die, and then the assets will pass back to A cleansed of taxable gains.)

[FigNewton]

Might the strategy mooted at the end of my second paragraph above (wife gifts all her assets to her terminally ill husband) be caught out by some anti-avoidance rule? Losing her husband will be traumatic, of course, but he may wish to arrange this as a last act to improve her future financial provision.

[pawncob]

You have to consider both CGT and IHT implications of any gifts. If below IHT threshold, then valuation uplift is worthwhile.

[FigNewton]

I don't understand how consideration of IHT is important. I thought that gifts of shares, say, between spouses while both are alive can happen without any tax consequences, and a surviving spouse can inherit everything without any inheritance tax payable, so the IHT threshold is no importance in the couples' planning. If I understand rightly, if he bequeaths his assets only to her, then she also benefits from 2 x £325,000 exempt amount in anything she subsequently leaves on her death. (I understand that a gift of a residential property might be less tax-free because it does incur SDLT.)

[pawncob]

Total assets are subject to IHT (and you don't mention any other assets).
IHT is 40%. CGT rates are much lower. Don't reduce CGT at additonal IHT cost.

[FigNewton]

I am considering two people who are married, transferring assets between one another so as to reduce CGT when the widow sells assets after her husband has died. I assume the wife inherits all the husband's assets. There is no IHT at that point, right? Once she also dies, then any remainder above 2 x £325,000 (assuming no changes in nil rate band) will be subject to 40% IHT, unless it is gifted to charity. But any IHT payable at that point will not be affected by any asset transfers that took place between the spouses while both were living. So there is no IHT cost to reducing CGT cost, right?

[FigNewton]

I am in particular thinking about this sequence: (1) husband dies and bequeaths all assets to wife (these being much greater than £325,000). (2) wife dies and bequeaths no more than 2 x £325,000 to relatives; the rest goes to charity. In this scenario no IHT is ever charged. The widow benefits from the fact that assets inherited from her husband have a stepped-up basis, so it is prudent to ensure that any assets containing large pregnant capital gains are in the husband's ownership before he dies. Shares can be transferred from wife to husband with no tax cost. But if a property not subject to Private Residence Relief is transferred from wife to husband then there is the cost of SDLT.

[maths]

Standard planning has always been for a spouse to transfer assets to the spouse who is about to die. As an inter-spouse transfer there is no IHT or CGT (assuming not a transfer from a UK domiciled to a non-UK domiciled).

On death of the spouse assets then revalued to their then market value for CGT purposes.

Assets left back to surviving spouse by will who thus inherits assets at mkt value thus wiping out accrued capital gains.