Making a Gift
The problem in the case of a gift (other than an inter-spouse gift) is that the person making the disposal receives no monies out of which to pay any capital gains tax (currently charged at 18%) which may arise (the gift is treated as a sale at market value).
This may discourage family members from making gifts as part of any family tax planning mitigation exercise.
Gift relief is designed to alleviate this problem; it permits the capital gain (and thus any tax liability) which is deemed to arise to be postponed. It does this by effectively transferring the capital gain to the recipient of the gift.
Dad owns unlisted ordinary shares in trading company ABC Ltd. Dad wishes to transfer by gift the shares to his son. Dad originally purchased the shares for £10,000. At the date of the gift the shares are worth £40,000. Dad’s capital gains tax liability is 18% of £30,000 (ignoring the annual exemption).
Dad and son agree to claim (see below) gift relief. As a consequence, son is treated as now owning shares with a base cost to him of £10,000 (i.e. £40,000 - £30,000) and effectively Dad is treated as having disposed of them for £10,000 (i.e. no capital gain).
Son later sells the shares for £55,000. Son’s capital gain is £45,000 (which is made up of Dad’s original deferred capital gain of £30,000 plus the £15,000 growth during son’s ownership period).
Conditions for Gift Relief to Apply
Unfortunately, gift relief does not apply to all forms of gift. It applies if:
• the gift is of a business asset; and/or
• the gift precipitates an immediate liability to inheritance tax.
1. Business Asset
Business assets include shares in trading companies which are not listed; or, shares in trading companies where the donor owns at least 5% thereof; or, assets used in a trade carried on by the donor.
2. Liability to Inheritance Tax
The “immediate liability to inheritance tax” condition is satisfied even though the liability may be at 0% (as opposed to 20%) because, for example, the quantum of the gift falls within the individual’s nil rate band (i.e. £325,000 for 2008/09) and irrespective of the nature of the asset (business or not).
Thus, gifts between individuals which do not attract an immediate inheritance tax charge cannot meet this condition although gifts into (or out of) most trusts would generally satisfy this condition. Gift relief does not therefore apply to gifts between individuals which are not business assets.
In addition to satisfying condition (1) and/or (2) above it is also necessary for:
• both the donor and donee to be UK resident at the time of the gift; and
• a formal claim to be lodged by both donor and donee (unless the gift is into trust, in which case only the donor needs to claim).
Any capital gain deferred under gift relief may in fact ultimately be completely wiped out (thus turning deferral into avoidance).
In Example 1 above, had son died whilst still owning the shares received from Dad, the £45,000 aggregate gain would not be subject to capital gains tax (death does not give rise to capital gains tax charges).
Gift relief is a useful form of relief where gifts of business assets are made amongst family members or where gifts are made into or out of family trusts. For individual donors/donees both parties must agree to gift relief applying which sometimes may be problematic if, for example, the donee refuses to agree.
As inheritance tax at 20% may also be chargeable on gifts, the ability to defer capital gains tax on the same transaction is a material advantage.