Deferring Capital Gains Tax On Gifts

 

Capital gains tax (CGT) is levied on capital gains made on disposals (including gifts) of most assets (e.g. shares; buy-to-let properties; antiques) by individuals at two rates, namely, 18% and/or 28%. The latter rate applies where the individual is subject to income tax at the higher rate of income tax.

 

To avoid a CGT charge on an otherwise taxable disposal requires an absence from the UK (i.e. non-residence) for more than five years. For many, in practice, leaving the UK is, of course, not feasible. However, deferral of any such CGT may be possible without such drastic action.

 

Deferral (which requires a claim to be made to HMRC) is possible in one of two ways, both requiring the disposal to take the form of a gift (or a sale below market value), namely a gift of a ‘business asset’ or a gift that precipitates an immediate inheritance tax (IHT) charge (i.e. even if the charge is at the nil (0%) rate). 

 

Deferral refers to the procedure under which any capital gain arising is ‘held-over’. This is achieved as illustrated in the following example; effectively, the gain of the individual making the gift is transferred to the recipient. Because of this, the recipient of the gift has to agree to the deferral (unless the transfer is to a trust).

 

Mr Smith bought unlisted (i.e. not quoted) shares in a trading company for £50,000. When their value had increased to £75,000, he gifted them to his daughter, Helen. 

 

Hold-over relief enables Mr Smith to avoid a CGT charge on the gain of £25,000. Helen is deemed to now own the shares which, for CGT purposes, have a base cost to her of [£75,000 - £25,000] £50,000. 

 

In essence, Mr Smith’s gain of £25,000 will be subject to CGT on the part of Helen if and when she disposes of the shares.

 

For hold-over relief purposes, a business asset may comprise:

• an asset used in a trade, profession or vocation carried on by the transferor or his personal company (i.e. company in which transferor owns at least 5% and the asset is used in a trade carried on by the company); or
• shares (or securities) in a trading company not listed on a recognised stock exchange; or 
• shares (or securities) in the transferor’s personal trading company.

In addition, land which qualifies for agricultural property relief (whether at 50% or 100%) for IHT purposes also qualifies as a business asset for hold-over relief purposes. On the other hand, for example, a buy-to-let property does not so qualify (but see below).

 

The gift of the business asset may be made to another individual, trust (assuming not ‘settlor-interested’) or company (but not where the asset transferred to the company comprises shares). 

 

For a gift to precipitate an immediate IHT charge, it requires that the recipient is a trust (N.B. the trust must not be settlor–interested); however, a gift to a company does not qualify for hold-over relief (even though such a gift would precipitate an immediate IHT charge). Unfortunately, a gift to another individual (perhaps the most common type of gift) qualifies as a potentially exempt transfer for IHT purposes, and hence no deferral is possible (unless, of course, the asset gifted is a business asset; see above). 

 

There is no restriction as to the type of asset which may qualify for deferral so long as an IHT charge arises on the gift. Thus, for example, a gift of a valuable antique or painting or a valuable piece of jewellery would qualify for hold-over relief.

 

Hold-over relief may be particularly attractive in, for example, the following scenario. Parents purchase a buy-to-let property (worth £250,000) when their two children are young. The property appreciates significantly and now the children are over age 18 the parents would like to gift the property to them. A straight gift would precipitate a significant CGT charge on the part of their parents. Instead the parents could transfer the property to a trust for the benefit of the children and claim hold-over relief. 

 

In due course, the trustees could appoint the property out to the beneficiaries (i.e. children over age 18) again claiming hold-over relief. The children thus take the property at the base cost of £250,000 (neither parents nor trustees being subject to a CGT charge).

 

The gift by the parents to the trust and the appointment out by the trustees each may have IHT consequences depending upon the amounts involved (but it is possible that no IHT will be precipitated so long as the property is worth no more than £650,000; each parent owning 50%).

 

Consider before making a gift whether a claim for hold-over relief could be beneficial.