It is more or less well known that substantial gifts of cash can be given to beneficiaries free of inheritance tax, provided the donor lives for a further seven years.
Much less familiar is the liability for capital gains tax of gifts of property and shares, irrespective of whether IHT is chargeable.
This CGT liability, which is assessed on the increase in value between purchase and the date of the gift, is payable by the donor unless capital tax relief (or ‘holdover relief') is claimed.
This relief transfers liability to the donee so that they only pay the CGT when the asset is sold. Although it does not exempt the gain from taxation, it does defer the tax payment until a later date.
Holdover relief is not available on the gifting of all types of assets, but may be claimed for:
- gifts of business assets;
- gifts of unlisted shares, for example in trading companies;
- gifts of agricultural land;
- gifts that are chargeable transfers for IHT purposes; and
- certain types of gifts that are specifically exempted from IHT.
In addition to these assets, other assets such as a holiday home can be gifted too, but with some tricky conditions attached.
To qualify for the CGT holdover it is necessary to gift the property to a trust, not an individual. In this instance, consideration also needs to be given to IHT as transfers to a trust are chargeable lifetime transfers.
Depending on what other gifts have been made, and the value of the property being gifted, there may be an immediate charge to IHT. There would also be tax issues if the donor continued to benefit from the use of the property.
Consideration would need to be given to the tax compliance costs in running a trust.
Claims to relief are made by completing and submitting the HMRC help sheet 295. The form reports details of the donor and donee, as well as details of the gift and its value.
HMRC needs to do much more to raise awareness.HMRC has said that some of these claims for relief are either not being made, or not being made properly. This is hardly surprising given the complexities involved (the form refers to different parts of the tax legislation), and often the implementation can be overlooked.
HMRC has issued nudge letters reminding both donors and donees of their obligations.
It is not unusual for individuals to be blissfully unaware of the potential CGT that can arise on the gifts of assets. This lack of awareness tends only to be matched by the shock that tax is payable on the transfer even though no cash is received in exchange for the asset.
Tax payments can be spread over 10 years where holdover relief is not available.
However, interest is payable on the deferred tax payments, so even this relief is unpalatable in the current interest environment.
HMRC has issued nudge letters about holdover relief claims during the 2021-22 tax year that had not been completed correctly. It tells recipients that they have 30 days to either amend their 2021-22 self-assessment return to remove the claim or to submit a valid claim form.
If action is not taken HMRC may amend the tax return or open an enquiry into the form. This could lead to unnecessary discussions about undue tax, penalties, and interest. Failure to respond to HMRC’s campaign could mean additional tax being payable.
There are good reasons for having these rules in place to prevent individuals avoiding CGT when disposing of assets. However, this is a clear example of the information gap that exists on important tax matters. A disposal can cover many more situations than a sale where cash is received.
Relief is available where the appropriate conditions are met. HMRC needs to do much more to raise awareness that where a tax relief is available, a valid claim needs to be made before it applies.
Any claim is at risk of rejection if it is not made within prescribed time limits or in the correct format.
Guy Sterling is a tax partner with Moore Kingston Smith
