Gift guide: The traps to watch out for

Gift guide: The traps to watch out for

With markets riding high, those wanting to pass on wealth in their lifetime may find themselves landed with a capital gains tax (CGT) bill in return for their generosity. 

Any gifts would then run the risk of double-taxation if the donor dies within seven years and the gifts fall into the inheritance tax (IHT) net.

Hold-over relief

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Gift hold-over relief is available to allow assets to be gifted without triggering a disposal for CGT purposes. The most common scenarios where hold-over relief is available are:

l Gifting assets that qualify for business relief, such as unlisted or Aim-listed shares held for the qualifying period, or agricultural relief

l Gifts that are chargeable lifetime transfers (CLTs) for IHT purposes, such as transfers into a relevant property trust and transfers out of a discretionary trust to a beneficiary. Hold-over relief is available regardless of whether any IHT is actually due as a result of the CLT.

Hold-over relief essentially passes the base cost of the asset to the recipient. The relief is particularly useful where the donor may not have suitable liquid assets to pay any CGT. 

Where hold-over relief is claimed, the gain that would have been realised on disposal is passed on to the recipient and reduces their acquisition cost. A simple example is given in Box One. Hold-over relief needs to be claimed with HMRC. For gifts into trust only the settlor (transferor) needs to claim. In other scenarios both the transferor and recipient need to claim.

The claim must be for the full gain on an asset. It is not possible to claim for only part and have the remainder classed as a disposal. For example, you could not subtract the annual exempt amount (AEA) from the gain and then hold over the balance. If transferring multiple distinct assets, such as a portfolio of shares, then a claim can be made for specific assets and not for others.

Relief from CGT is automatically available on gifts to charities and certain other bodies, and gifts of works of art in specified circumstances.

Planning around CGT

A typical scenario for an adviser is one where an individual wants to undertake some IHT planning but assets are invested and showing healthy gains. 

Selling the assets to make a cash gift would trigger a disposal for CGT purposes, as would a direct gift. The client may not have the desire or cash to pay the CGT liability and may therefore need to reduce the value of the gift accordingly.

However, where a discretionary trust would meet the client’s estate planning objectives, hold-over relief could be used to pass the gain on to the trustees. The trustees could then rebalance the portfolio over several tax years to minimise any taxable gain. They could also pass on a held-over gain as/when they decide to distribute capital to a beneficiary. See Box Two.