Capital gains tax (CGT) is a tax levied on capital gains, broadly, gains arising on a disposal of many, but not all, assets (e.g. shares, antique furniture, jewellery).
Example 1 – Sale of shares to a friend
Herbert Black bought 100 quoted shares for £500. He sold them a few years later for £2,000 to his friend Brian.
Herbert has made a capital gain of £1,500.
The rate of CGT (for an individual) is 18% and/or 28%; the exact rate depends upon the individual’s marginal rate of income tax.
Gifts
In Example 1 above Herbert sold the shares. What would happen if instead he had given the shares away?
Example 2 – Gift of shares to a friend
Herbert Black bought 100 quoted shares for £500. He gave them away a few years later (when they had a value of £2,000) to his friend Bert.
Herbert has made a capital gain of £1,500.
In short, the same CGT consequences arise for Herbert whether he sold the shares or gifted them; the term ‘disposal’ catching both sales and gifts.
But does it matter to whom a gift is made? In short, yes it can.
Gifts to connected versus non-connected persons
Where an asset is gifted and thus no monies are received, it becomes necessary to determine the asset’s value. For CGT purposes, the legislation provides that in such cases the value is deemed to be market value at the date the gift is made. In Example 2 above, it is therefore assumed that at the date of the gift the shares had a disposal value of £2,000.
The identity of a recipient of a gift may be important because if a capital loss arises on a gift to a ‘connected person’ such a loss can only be offset against gains made on a disposal to the same person. However, if the gift is made to a person who is not connected then there is no restriction on utilising the loss should one arise.
Example 3 – Losses on share disposals
Barbara owns 1,000 ordinary shares in XYZ Plc for which she paid £1,500.
She also owns 2,000 ordinary shares in ABC Plc for which she paid £2,500.
Currently, the shares in XYZ Plc are worth £1,000 and those in ABC Plc are also worth £1,000.
She wants to make a gift of all the shares. She is proposing to gift the XYZ shares to a friend of hers, Sarah, and the ABC shares to her sister, Sue.
Barbara speaks to her tax advisor.
Unless Barbara has non-tax reasons for specifically gifting the XYZ shares to Sarah and the ABC shares to Sue then for CGT purposes it may be more CGT efficient to swap the gifts (i.e. the XYZ shares go to Sue and the ABC shares to Sarah). The reason for this is that the bigger loss arises on the gift of the ABC shares which, if gifted to her sister Sue, is a gift to a connected person and thus Barbara can only use the loss against future gains on gifts to Sue (which she may never make). In essence, the larger loss of £1,500 is ‘locked-in’.
By giving the ABC shares to Sarah (who is not a connected person), Barbara can offset the larger loss against any gains Barbara may make on any future sales/gifts. In other words, Barbara retains the greatest flexibility to use her capital losses.
Definition of connected person
The definition of a ‘connected person’ is very wide. As noted above, Barbara’s sister is a connected person. However, a connected person includes a spouse (or civil partner) and any relative (which includes brother, sister, ancestor (e.g. grandparent) or lineal descendant (e.g. son or daughter)). It also includes trustees of a trust that the person has set up; a company that the person controls; and partners in a partnership. Where spouses separate, they continue to be connected until the date of the decree absolute.
Invariably, in practice, any gifts are almost certainly going to be made to a connected person (i.e. typically, gifts are not made to unrelated third parties).
Practical Tip:
Make sure when a gift is to be made that consideration is given to whether it is in fact to be made to a connected or non-connected person, and if the former, that the CGT consequences are fully understood.
