Did you know that Capital Gains Tax can be an issue when gifting assets as well as when selling assets?
If you are considering making a gift of an investment property or a valuable family heirloom to a child or family member you could accidentally trigger a charge to CGT.
The easiest way to highlight the potential issues and to illustrate how we can help reduce any potential liability to CGT is by way of an example.
John has an investment property which he no longer needs. It was providing him with an income but he has reached pensionable age. In order to reduce his potential liability to IHT he has decided to gift the property to his son James.
When John purchased the property is was worth £150,000 and it is now worth £200,000. John never had a mortgage over the property but two years ago he did build an extension at a cost of £20,000.
John’s gift to James is a ‘disposal’ for CGT purposes. Even though John is not receiving any consideration in return for the property, CGT is still charged on the gain in value.
The gross gain is £50,000 (£200,000 (value at date of gift) less £150,000 (purchase value)).
From the gross gain we can deduct the £20,000 which John spent in improving the property. This leaves a net gain of £30,000.
John can set his annual exemption of £11,300 against the gain meaning that the chargeable gain is £18,700. John will pay tax at a rate of 28% as he is a higher rate tax payer meaning the CGT due will be £5,236.
This means that John has a tax bill of more than £5,000 but has received no money in respect of the property with which to pay the tax. Likewise, James has received a property from his father but might not have the available cash in order to help his father with the tax bill.
How we can help
If John is married we would suggest transferring half of the property to his wife before making the gift to James. Transfers between spouses are not subject to CGT. Therefore, when John and his wife both make the gift to James, two annual exemptions can be set against the gain. This immediately reduces the chargeable gain from £18,700 to £7,400 and tax at a higher rate to £2,072.
Furthermore we would advise John and his wife to stagger the gift over two tax years. If they were to gift half of the property now and half next April, they would each be able to set to years’ worth of annual exemption against the gain, reducing the chargeable gain and the tax to £0.
The gifting between John and his wife and then down to James are set out using deeds of gift and declarations of trust.
If you are considering making a large lifetime gift of a specific asset, rather than cash, please get in touch with our private Wealth team who would be happy to help.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.