The FT published this enquiry from a reader over the weekend:
I own a share of a residential property that cannot be sold at present as it is subject to a lifetime occupancy agreement with the co-owner. It was bought decades ago so, when it is eventually sold, there will be a substantial capital gains tax (CGT) bill. But I want my children to receive all the proceeds from my share of the property. Can I therefore mitigate the eventual CGT liability by transferring some of my interest in the property each year into a trust for them? Will HM Revenue & Customs (HMRC) accept that the annual gift made under the deed of trust has in fact been carried out — that is, I will not be subject to CGT on the transfers?
A long, complicated, expensive and tortuous explanation of a mechanism using what seem to be wholly artificial trusts as a way to avoid this capital gains tax charge was provided by a chartered accountant — who in fairness concluded that even then “there could still be some CGT to pay on its ultimate sale”, as if this was a matter for apology.
One of my regular correspondents — who I am not sure will ant to be named, but can confess in the comments that follow this blog if thy so wish — mailed me to say:
Hi Richard
I always have to torture myself by reading the FT weekend Money supplement. This week a columnist was suggesting a complicated way of avoiding CGT on a share of a property bought many years ago. Now I don't blame in the least the one seeking advice. Most people do not consider tax a moral issue - why should they? But I do blame those who give this advice in national newspapers. Gains from property sales, where there is no owner occupation involved, are absolutely unearned. The advisers know this full well. Wouldn't it be good if they could add a bit of moral education to their comments and point out that the avoider is actually forcing others less fortunate than themselves to pay the tax which they don't?
Glad to get that one off my chest.
Quite so. The tax profession has a duty to be ethical. That includes, I think, pointing out the need to pay tax and that the mechanisms to avoid doing so are very often absurd, unproductive and anti-social for society as a whole. But the profession does not, I regret, seem to appreciate this point, so no criticism attaches to the respondent in this particular case.
I just look forward to the more enlightened times my correspondent also clearly wishes for.
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“Gains from property sales, where there is no owner occupation involved, are absolutely unearned.”
I don’t see the justification for the “no owner occupation” qualifier. Other than gains attributable to renovation and building, all gains from property sales are unearned, owner occupation or not.
@PaulL
(It was my email). The capital gain is only realised by an owner-occupier when he sells or downgrades. That’s what I was trying to distinguish. But I agree what you say.
First thought: capital gains tax is completely broken. There is no justification for taxing all gains at a lower rate than income tax (although there is an argument, that I don’t find terribly convincing, that some entrepreneurial gains should be taxed less). The annual exempt amount is too high, and an invitation to abuse – it should be set at a de minimis level, e.g. £1,000.
Second thought: IHT is broken – its ease of avoidance means it’s become semi-voluntary. It should be replaced with a US-style tax covering lifetime gifts as well as gifts under Wills.
@Marc Daniels
Agreed on all counts
There would be no capital gain on landed property if the whole rent were extracted for public benefit (annual land value taxation). The true capital involved (bricks and mortar) only depreciate in value.
Absolutely agreed, Carol.
Plus, by removing the need for CGT on landed property, it would close all the loopholes and remove the unnecessary waste that occurs due to enforcement on one side and planning on the other.
Paul, does it matter that a gain is “unearned”?
@Greg
Yes – if you believe in encoraging redistributive qualities of taxing wealth ahead of earnings. This has pretty much been the consensus since Lloyd George was PM.
I would be interested to know if you disagree with that view and why? Although I’m not sure Richard is!
@Alex S
The consensus? Hardly – save for a brief period in the 60s and 70s, capital gain has been under-taxed compared to earnings, and wealth not really taxed at all.
In general terms, taxing gains which haven’t been created by the beneficiary, rather than those which have, creates less economic distortion and deadweight loss, as you don’t create any disincentive for the person who is creating the wealth.
@Alex S
I’m all ears 🙂
Sorry for the delay in replying to your questions. I’ve been away. However i’m not sure if it’s worth responding after such a length of time.
But anyway….
@ Alex S. No, I don’t believe that wealth should be taxed ahead of earnings.
@ Paul. I understand where you are coming from. However, I think my issues come from working out what would be termed “unearned”. If I buy land thinking it will appreciate in value, would you describe that as unearned?
Yes, because the change in the value of a land title isn’t created by the actions of the person holding it and as land is in fixed supply, speculation in it can’t create any change in the quantity of it available.