• Date

    23 Feb 2024
  • Category

    Private Client Services

Capital Gains Tax: Careful management required when transferring property to a spouse

In the world of tax, one misstep can potentially lead to taxpayers receiving large tax bills. In a recent tax case, a commercial property investor unfortunately discovered this to great effect. In this particular example, the individual concerned was looking to transfer property to a spouse with the intention of utilising Capital Gains Tax (CGT) exemption. However, due to the way in which the transaction was undertaken, a significant tax bill was instead raised.


The case explained

In Mahmood v HMRC [2024] TC09056, the taxpayer, Mr Mahmood, owned a portfolio of 10 commercial properties, as well as being an accountant (though not a tax specialist) of 35 years. Mr Mahmood wanted to transfer the properties to a company owned by his wife (RKP Ltd), to ensure she held ownership as his own health was declining.

Mr Mahmood understood that there is an exemption for transfers of assets between spouses for Capital Gains Tax and believed that the transaction would be exempt. Unfortunately for Mr Mahmood, the spousal exemption was not available in this case as the properties were being transferred to his wife’s company rather than to her directly.

As Mr Mahmood and RKP are connected parties, the transaction was also deemed to have taken place at market value rather than for the actual consideration which was much lower.

Upon realising his mistake, Mr Mahmood and RKP Ltd agreed to rescind the transaction on the basis that the two parties would not have entered the transaction if they understood that a substantial taxable gain would arise. However, the tribunal found that this did not prevent the original transaction from occurring.

As a result, HMRC initially sought £303,476 of CGT and a further £81,938 of penalties for an inaccurate tax return being submitted omitting details of the transaction. After going to court, HMRC have agreed to reduce the tax due and penalties to a total of £46,121 - partly on the basis of an updated valuation being provided. Whilst this is a significant reduction to the initial amount, the liability, penalties, and stress could have been avoided entirely by putting the properties into his wife’s name directly.


The importance of seeking professional tax advice

The scenario above provides a specific example of the tax bill individuals could face should their personal wealth not be managed in a suitable manner. As such, it’s strongly recommended that professional tax advice is sought before undertaking any projects.


We are here to help

If you would like to discuss any aspect of this article further or gain insight as to how specialist tax advice can benefit you, please get in touch with a member of our specialist team or your usual Azets advisor.

About the author

Lisa Macpherson-Fletcher Photo

Lisa Macpherson-Fletcher

Partner - Tax Advisory Perth
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