Date posted: 11th Dec 2023
Christmas is the time for giving – but watch you don’t give a gift to the taxman if you decide to give away an asset this Christmas (or any another time for that matter!)
It is important to realise that the gift of an asset (e.g. shares, a property, a business etc) may have implications for capital gains tax and inheritance tax.
Capital gains tax (CGT)
Where an asset is transferred at undervalue to a connected person (usually family), there is a potential CGT charge to consider, despite the fact that perhaps no monies were received.
For instance, if a father gives away a buy to let residential property (worth £100,000) to his adult daughter, that he had acquired for £20,000 in 1983 as an investment property, then he may have to pay CGT on £80,000, even though he has given the asset away for nothing. The CGT will be due within 60 days of the gift and will need to be reported to HMRC.
For the gift of business assets, there may be the ability to claim “gift holdover relief” but the facts would need to be considered. If this relief is available, it must be claimed via a jointly signed election that is subsequently submitted to HMRC – usually as part of the donors tax return for the tax year of the gift.
There is usually no capital gains tax charge associated with the gift of money. However, watch for gifted monies in foreign currency, crypto currency etc.
Inheritance tax (IHT)
A gift of an asset (including cash) is likely to have an implication from an IHT perspective.
Gifts to individuals will usually be regarded as a Potentially Exempt Transfer (PET) i.e. potentially exempt from IHT. If the donor passes away within seven years, the gift may be counted in the value of the deceased’s estate for the purposes of working out whether IHT is due, even though it is not owned by them.
If a benefit is “retained” from the gift, it will still count as part of the donor’s estate at the date of death, regardless of whether the seven year period has passed. This could be the case if a mother gives away her residence to her adult son, but she continues to live there rent free, until she passes in 25 years time.
Gifts to companies and trusts will be regarded as a Chargeable Lifetime Transfer (CLT) and could be subject to an immediate IHT charge at 20%. Much will depend upon the individual’s circumstances in respect of previous gifts and the availability of the nil rate band.
Please take professional advice before you gift any assets as you may end up with an unexpected tax charge. As ever, we are here to help.
