It is by no means uncommon for people who own properties to give them to their children, even though such gifts may be subject to Capital Gains Tax (CGT) if the value on transfer is greater than the cost and the principal residence exemption does not apply…the reason for this being that the amount of the ‘deemed proceeds’ of the property for CGT purposes is the value of the property on transfer, not the actual proceeds (which would be nil for a gift).For Inheritance Tax (IHT) purposes, such a gift represents a potentially exempt transfer at the market value of the property on the date of transfer, so it is possible that such a gift can lead to both a CGT and an IHT liability.
Things can get even more complicated if the donor becomes insolvent. When a property is transferred out of the possession of someone who becomes bankrupt, or is bought for someone else by a person who becomes bankrupt, and there is intent to defraud the creditors, under the Insolvency Act 1986 the transaction can be voided by the court. This would incidentally have the effect of reversing the tax charges referred to above.
To void such a transaction, the court has to be persuaded that it was intended to defraud creditors, being entered into for the purpose of either putting assets beyond the reach of anyone who is making, or may at some time make, a claim against the donor, or of otherwise prejudicing the interests of such a person in relation to any claim.
The decision is based on the facts to hand. The bankrupt’s financial state at the time of the transaction, the time between the transaction and the person becoming bankrupt, the underlying motivation for the transaction and whether or not the transaction was ‘real’ or the bankrupt retained control over the property will all be in point.
In a recent case reviewed by one of our expert advisors, Solicitor Emma Walker, the trustee in bankruptcy attempted to recover for a bankrupt man’s creditors title to three properties he had given to his daughter five years before he was made bankrupt.
The attempt failed as there was not sufficient evidence that he had any financial problems at the time of the transactions or that they were carried out for the purpose of defrauding creditors.
In circumstances like these, motive is important. If a person, for example, distributes their estate to their family and then later embarks on a path that results in bankruptcy, it is unlikely that the transactions will be able to be voided.