Transfer between spouses (and possible non-IHT tax implications)

[oswich]

(First post and if this is not the right forum, please mods, move it.)

My wife and I have lived in the UK and been tax-resident here for the last 25 years. (I assume that we are now, after 25 years, both deemed domiciled although we never formally stated this in any communication with HMRC or other government bodies.)

We're now getting into an age bracket where inheritance matters are becoming more important. So we have looked into this area now in some detail and what basically seemed relatively simple is perhaps not as simple as we had hoped.

The idea has been, for a very long time, that the surviving spouse will receive everything (we have no kids) and that in this case, there will be no direct IHT implications (that's what I meant when I wrote "relatively simple"). Is that right?

We have either joint accounts (banks, UK savings, UK portfolio) or otherwise share ownership 50/50 (eg home). The only exception here are the ISAs which are of course personal and not joint (though they are very similar in terms of value). My understanding is that the ISAs of the dead person will lose the tax-free status from the moment of death so that the other then has to pay taxes on any ISA income and, if there are any, capital gains. Does this mean that all ISA CGs till moment of death are and will stay tax-free and that future CGs will be calculated basically as "value sometime later" minus "value at death"?

We also have a small joint portfolio outside of ISAs. How is that dealt with? Will the death of one create an implicit sales event with possible CGT consequences or do the holdings just move over to the surviving spouse?

And to complicate matters further, we also have a joint portfolio in the Netherlands (when we moved to Britain, we never closed that and kept everything in NL). Again, I assume there may be CGT implications for the other if one of us dies.

The point of this is get an idea which areas might need further attention and possibly even action as now we can still act without time pressure and at our own pace. So any help (or links to HMRC pages etc) especially regarding those CGT matters would be very helpful. Also, if there is some important area or aspects which I have overlooked please do tell me. And thanks for reading this sermon.

[maths]

The idea has been, for a very long time, that the surviving spouse will receive everything (we have no kids) and that in this case, there will be no direct IHT implications (that's what I meant when I wrote "relatively simple"). Is that right?

Correct.

We have either joint accounts (banks, UK savings, UK portfolio) or otherwise share ownership 50/50 (eg home). The only exception here are the ISAs which are of course personal and not joint (though they are very similar in terms of value). My understanding is that the ISAs of the dead person will lose the tax-free status from the moment of death so that the other then has to pay taxes on any ISA income and, if there are any, capital gains. Does this mean that all ISA CGs till moment of death are and will stay tax-free and that future CGs will be calculated basically as "value sometime later" minus "value at death"?

Correct

We also have a small joint portfolio outside of ISAs. How is that dealt with? Will the death of one create an implicit sales event with possible CGT consequences or do the holdings just move over to the surviving spouse?

No. On death there is a CGT free uplift.

And to complicate matters further, we also have a joint portfolio in the Netherlands (when we moved to Britain, we never closed that and kept everything in NL). Again, I assume there may be CGT implications for the other if one of us dies.

See above.

[oswich]

Thank you very much for that. "GCT uplift" was a good pointer for Google and I am now much clearer about this CG thing. It seems this is not as difficult as I feared. I am still looking into the offshore portfolio as I have read somewhere (but can't find it now) that there may be tax implications. I am pretty sure I can find that page again and if so will post it. Again thanks, appreciated!

[oswich]

I've found the page I mentioned above. See this, final paragraphs:
https://www.lexology.com/library/detail.aspx?g=74a0b270-350d-4088-83f2-a1a1c6abc874

A particular trap also applies to NonReporting Funds if they are still held by the individual on death, as illustrated below:
Scenario 1:
Marco dies owning a Reporting Status Fund which he acquired for £5m and is now worth £6m. The investment benefits from an uplift in base cost for CGT purposes upon his death and so his heirs inherit it as if the base cost was £6m. If they dispose of it before it increases in value, there will be no CGT to pay on this investment.

Scenario 2:
Marco dies owning a Non-Reporting Status Fund which he acquired for £5m and is now worth £6m. Marco is deemed to have disposed of the fund immediately before his death, triggering the offshore income gain of £1m, taxable at 45%, giving rise to an income tax liability of £450,000 (unless the remittance basis of taxation is claimed by Marco's executors in respect of the tax year of death).

I have then looked further and found this:
https://arnoldhill.co.uk/news/offshore-funds-tax-treatment-on-disposal/

Non Reporting Funds CGT
Transactions arising as a result of certain events, such as death of the investor, share for share exchanges, company reconstructions and reorganisations, do not generally attract any CGT as they are not treated as disposals. However, in the case of non-reporting funds, any such transaction is treated as a deemed disposal resulting in an offshore income gain, which may give rise to a dry tax charge, with the deemed proceeds being be equal to the market value of the shares.

I do think we have a non-reporting fund in our NL holdings, so if I understand that correctly, the death of one of us would indeed trigger a gain/loss event.

[AGoodman]

Also, on death, an ISA can effectively be transferred to a spouse so maintaining the tax free status.

(in practice, you transfer the assets to the spouse's ISA rather than transfer the ISA itself).

[oswich]

> an ISA can effectively be transferred to a spouse

Oh... that's news to me, I thought on death the ISA status just vanishes. So if that's the case (at least for spouses) then that's one thing not to worry about.

As to the non-reporting funds... that's a real blow if it's true. We'll have to find ways either to deal with that or try to get rid of that non-reporting fund. The problem is that there's some gain which'll count as income not capital gains. Whatever you do, the taxman was there before you.

[maths]

Non-reporting fund legislation is complex.

However, gains arising are subject to income not capital gains tax; there is also no uplift on death as applies to CGT.