31 July 2014
With asset values on the rise, many of my clients’ thoughts are turning to Inheritance Tax (IHT) planning. That can sometimes lead to thoughts about giving away assets to children in lifetime in the hope of surviving seven years. However, it seems even the best laid IHT mitigation plans can come unstuck when Capital Gains Tax (CGT) is factored in.
Unfortunately, gifts still count as disposals at market value for CGT purposes so, unless a relief (such as private residence relief) applies, gifts can trigger CGT and the giver may need to find extra, liquid funds, above and beyond the gift itself, to pay the resulting CGT bill.
Of course, gifts of cash and exempt assets such as some chattels avoid any CGT problems. And gifts involving business assets and gifts to trusts can often put off the CGT charge for another day (or potentially forever) if the giver elects to hold over the gain. If none of these apply though, what then? Here are some ideas for generous parents wanting to manage the CGT consequences of gifts to their children:
- Spouses and civil partners who are ‘living together’ are in the happy position of being able to swap virtually all types of assets without triggering CGT. Find the spouse/partner who has the most CGT annual exempt amount available (£11,000 in the current tax year), or the most capital losses to use up, and get them to make the gift.
- The annual exempt amount renews itself every year, of course. Accordingly, consider the feasibility of spreading the gift over a number of tax years. For example, spouses might be able to give away slices of the equity in jointly owned assets over a number of tax years and, as long as the gain crystallised on the slice given away each year does not exceed twice the annual exempt amount (currently £22,000), there will be no CGT to pay.
- For gifts of land and certain gifts of unquoted shares, it is possible to elect for the CGT to be paid by equal instalments over a period of ten years (although interest is due on the unpaid tax). Any outstanding instalments and interest are immediately payable if the subject of the gift is subsequently disposed of for value, if the gift was made to a family member. This option may aid cash flow and instalments could be paid by someone else (the grateful recipient of the gift, maybe?).
- If the problem is that the giver lacks liquid funds to pay the CGT, consider disposing by way of a sale to the family member, rather than by way of gift. The consideration given need not be at the full market value. It could be set at an amount equivalent to the CGT that needs to be paid as a result of the sale. For CGT purposes, sales to connected persons, such as family members, are always calculated on the basis of market value but the sale at an undervalue allows the recipient child to get money for the CGT bill into the hands of the parent, without making a gift themselves for IHT purposes.