Capital Gains liability

I was very interested in a piece you wrote a couple of months ago on, inter alia, the transfer of shares in joint names into the name of the older partner to cut capital gains liability in the event of that partner's death. My position is largely the same. However, despite differences in age, I have frequently found that death makes its own choice as to who goes first. My query therefore is that, assuming the shares are left in both names, what is the capital gains tax (CGT) position when the first person dies? To be more precise, let us assume the husband - the original sole owner of the shares - dies first.

Since effectively only half the shares are now passing to the survivor - and, therefore are free of capital gains tax - is there still an in-built liability to CGT on the half of the shares which were passed when the husband was still alive?

If such an in-built liability exists, how would the Revenue Commissioners treat any subsequent sale of the stock by the surviving spouse?

Assuming the wife dies first, would that half of the shareholding, now passing back to the husband and original owner, now lose its CGT liability?

Assuming one partner knew that, due to a terminal illness, they were due to die in the short term, would it not make sense to have the shares in that spouse's name solely so that, on death, the entire shareholding would revert to the survivor free of CGT liability?

Mr B.O'D., Donegal

In general, most people are pitifully poor at tax planning and availing of the limited scope granted them by the government to cut their bill from the Office of the Revenue Commissioners. The one exception in my experience is capital gains tax (CGT), which many seem to find a prime candidate for reducing the Revenue's revenue. It appears you, too, have given it a lot of thought and most of what you say is perfectly true.

Any transfers of stock between spouses during their lifetime are free of CGT at that point. However, when the stock is sold, the Revenue considers the original purchase date when assessing the CGT bill, regardless of which spouse bought the shares and which one is now disposing of them.

The situation at death is somewhat different. Again, there is no CGT liability on the transfer of shares to a surviving spouse in the same way as there is no inheritance tax on the transfer of property from one spouse to another on death. In this case, however, the capital gain between the date of purchase of the shares and the transfer to the surviving spouse is discounted. That is to say, the shares are transferred without any capital gain and are valued at the market rate on the date of transfer.

So, as you assume in your first question, while there would be no liability on the shares passing to the widow from the deceased husband, there would still be a capital gains liability in relation to any earlier transfer.

This essentially gives the answer to the second question. The revenue generally works on the assumption that, when part of a shareholding bought at different times is sold, it is the part bought first which is sold first. This makes sense as any other system would lead to endless challenges by investors who might have bought, say, AIB stock on a number of different dates, or even acquired the shares at different times in lieu of dividends.

This being so, the Revenue will assume the first shares to be sold by the surviving spouse are those that transferred during the former husband's lifetime and which still carry their full capital gains liability.

In relation to your third question, you are correct when you raise the anomalous position that stock originally bought by the husband but transferred to the wife would, upon her death, transfer back to him free of capital gains liability despite the fact that he was the original purchaser. As you say at the outset, death can be fickle so moving shares into one name or two at any point up to death is a gamble. In the case you raise in your third question, the shareholder profits; in your first question, the shareholder does not profit as much as he might by transferring only half the shareholding into his wife's name before his death. The point is that, as with any dealings in shares, it is a gamble; you take your chances and either profit or pay the price depending on how the situation unravels.

Your fourth question shows a certain Machiavellian touch which professional tax planning advisers would cheer. It is true that it would seem to make sense in a situation where one spouse seems certain to die first, such as in the advanced stages of a terminal disease, to transfer any stock to that spouse's name so that the whole lot passes to the survivor free of any inbuilt capital gains liability. However, what would happen if the supposed survivor were to predecease the terminally ill patient due to a sudden death - car crash, heart attack, whatever. As I say, it is a gamble. The odds are good but there is no guarantee.

Bed and Breakfast deals

In a recent piece on bed and breakfast deals, you referred to the tax-free threshold for capital gains tax as £1,000 (€1,270) each year. However, looking back at the 1998 Budget, this appears to have changed to £500 per person per year. If so, a correction might be appropriate or was the latter limit rescinded prior to the Finance Act.

Mr A.N., Dublin

You are quite right when you said the Minister for Finance, Mr McCreevy trimmed back the capital gains tax-free threshold to £500 in his 1998 Budget. Indeed, it was one of the highlights of the Budget as the halving of the allowance occurred at the same time as the ending of the practice of allowing married couples to transfer such allowances between them.

Intensive lobbying followed with the financial services industry, among others, arguing that the measure would hit many small investors, particularly the elderly, who often rely on the judicious selling of inherited or accumulated stock to pad out their pension allowances. As a result, the Minister decided to revert to the old £1,000 per person per annum limit, while continuing with his proposal to end the transferability of such an allowance.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, Fleet Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.