Tax Misconceptions

Unfortunately, people too often undertake high value transactions without getting proper advice as to the tax consequences. A classic example of this arose recently at the Tax Tribunal.

In 2016, a husband transferred ten commercial properties to a company owned by his wife. The disposal was not reported on his tax return as he believed that:

• the spousal CGT “exemption” applied; and (anyway)
• no gain arose, as the properties were transferred for consideration equal to their CGT base cost (£300,000).

In early 2019 (while an HMRC enquiry was ongoing) the husband and the company agreed to ‘rescind’ the transfer of the properties, by transferring them back to the husband.

HMRC assessed him for CGT on the capital gain arising on the original transfer, based on the market value of the properties; he was also charged penalties for submitting an inaccurate tax return.

He argued that the transfer of the properties had been rescinded in 2019, such that no taxable disposal had taken place in 2016.

What did he get wrong?

1. Inter-spousal transfers are not exempt CGT. They take place on a no gain/no loss basis, meaning that the transferee takes over the original owner’s CGT cost. Any gain or loss on a subsequent disposal by the transferee will therefore reflect the combined ownership of the couple.
   This mistake of itself would not have triggered a CGT liability for the husband, but the no gain/no loss rule only applies to direct transfers between spouses, not, as in this case, transfers from one spouse to a company owned by the other spouse.
2. A taxpayer is ‘connected’ (for CGT purposes) to a company controlled by a spouse, so the transfer is deemed to take place at market value for CGT purposes. The husband only receiving consideration equal to the base cost of the asset therefore did not mean that no gain arose.
3. Although a transaction may be void if entered on the basis of a mistaken legal assumption, this only applies where the mistake is sufficiently fundamental and affects either the subject matter or the performance of the transaction.
   That was clearly not the case here, as the CGT liability had no effect on:
   • the terms or subject matter of the transaction (i.e. the transfer of the properties in return for consideration left outstanding as a debt in the company); nor
   • how the transaction was performed (i.e. the transfer of legal title from the husband to the company, using the appropriate land registry forms).

When can a transaction be rescinded?

Rescission is possible, but only where the transaction has not been fully executed. This means that one or both parties must still have outstanding obligations to perform. (This was clearly not relevant in this case, as the contract had been fully executed.) However, any rescission in such circumstances would not mean that the transfer of the properties could be ignored; it would simply put an end to any further obligations yet to be performed.

In summary, the fact that the transfer was reversed by his wife’s company transferring the properties back to him did not mean that the original transfer could be treated as if it had never taken place. There was a disposal of the properties for CGT purposes by the husband in 2016, at their market value.

Don’t end up with the sort of problems that this taxpayer had. Even if what you are planning to do appears to have no tax consequences, please contact us in advance of doing anything to check.