Lifetime gifts: tax-free?
Details
Most parents wish to pass on their wealth to their children, and those who may be in a position to do so will want to ensure that any lifetime gifts are made in the most tax efficient manner.
Even if no cash is changing hands on the transfer of assets from a parent to their child, the gift may trigger unexpected tax liabilities.
Capital Gains Tax
CGT is a tax on the profit when an individual sells or disposes of an asset that has increased in value. A gift is treated as if it were a disposal at full market value. It is assessed in conjunction with the giver’s income tax, therefore the rates vary depending on the individual’s income in each tax year.
Unless an exemption or relief can be claimed, basic rate taxpayers will pay 18% on gains from the disposal of residential property and 10% on most other assets whereas higher rate taxpayers will pay 28% on gains from the disposal of residential property and 20% on most other assets.
Every individual has an annual allowance (currently £12,300 for 2020/21) which can be offset against any gain, however this allowance cannot be carried forward and will be lost if it is not used.
Inheritance tax
As well as considering the CGT position when gifting, an individual should also consider the potential inheritance tax implications.
Outright gifts are not usually subject to an immediate inheritance tax charge, however an individual has to survive seven years from the date of the gift to ensure that there is no inheritance tax payable ultimately.
If a parent wishes to gift, for example, an investment property or a holiday home to their children, there may be an immediate capital gains tax liability of up to 28% of the total gain and, if the parent died within seven years, there may be a further inheritance tax liability of up to 40% of the total value of the property that has been gifted.
Some points to consider
- It is possible to mitigate the potential tax liabilities on gifts through careful planning, within HMRC rules.
- There is no capital gains tax charged on the increase of the value of your primary residence.
- Limited exemptions may apply to gifts of certain items e.g. jewellery.
- Transfers between spouses are exempt from capital gains tax and inheritance tax.
- Relief from CGT may be claimed on the disposal of some business assets.
- There is capital gain uplift on death, i.e. assets are revalued at market value, but no CGT is payable.
- Cash is not subject to capital gains tax.
With the government looking at potentially overhauling the CGT system – and current circumstances meaning that assets may have dipped in value – anyone considering making substantial gifts should act sooner rather than later. Before doing so, it is more important than ever to take professional advice.
