January 2021
Neil Da Costa keeps it simple in explaining the CGT and IHT implications of lifetime gifts.
Here, I am going to show you how to keep it simple. Having been an Advanced Tax lecturer for more than 20 years I am fully aware of which areas examiners say that students struggle with. These areas feature regularly in the tax exams, and by ensuring you understand them you can be confident of earning these marks in the question. In this article I will be showing you how to deal with the CGT and IHT implications of lifetime gifts using simple examples. To help your understanding I will contrast the differences between the gift of an investment property with a gift of a business asset.
Example: Moneybags and Skint When an individual gifts an asset to another individual, the disposal takes place at market value and a CGT liability arises on the donor.
Moneybags is a wealthy individual who decides to gift a rental property worth £1 million to his nephew Skint. Moneybags bought the property for £300,000 many years ago and has already used his CGT annual exemption for the tax year. He is an additional rate taxpayer.
The CGT liability payable by Moneybags is (£1,000,000 – £300,000) = £700,000 x 28% = £196,000.
IHT implications of a gift: A gift to an individual is called a potentially exempt transfer or a PET and is only taxable if the donor dies within seven years of the gift. The value taxable is the value at the date of the gift NOT the value at death.
Each tax year, we get an annual exemption of £3,000 for IHT. If you do not use it, it can be carried forward to the next tax year.
Exit Moneybags
Moneybags dies three years later when he unfortunately crashes his Rolls-Royce.
At the date of death, the rental property is worth £1.2 million. Moneybags did not make any other lifetime gifts. The value of the property at the date of the gift was £1 million.
The IHT liability payable by Skint is: (£1,000,000 – 2 x £3,000 annual exemption) = £994,000 – £325,000 nil rate band = £669,000 x 40% = £267,600.
CGT implications for business assets: Business assets like furnished holiday lettings are eligible for CGT reliefs such as entrepreneurs’ relief, rollover relief and gift relief. In terms of IHT reliefs, business assets are eligible for 100% business property relief which makes the asset tax free for IHT.
Another example
Moneybags is a wealthy individual who decides to gift a furnished holiday letting (business asset) worth £1 million to his nephew Skint. Moneybags bought the property for £300,000 many years ago and has already used his CGT annual exemption for the tax year. He is an additional rate taxpayer.
Moneybags’ capital gain of (£1,000,000 – £300,000) = £700,000 will be postponed under gift relief and is deducted from Skint’s cost of £1 million.
Skint’s base cost going forward would therefore be £300,000 which is the same as Moneybags’ original cost.
In order to claim gift relief, Moneybags and Skint should make a joint election within four years from the end of the tax year of the gift.
IHT implications for a gift of a business asset: Moneybags dies three years later when he unfortunately crashes his Rolls-Royce.
At the date of death, the business asset is worth £1.2 million. Moneybags did not make any other lifetime gifts. At the date of death, Skint still owns the business asset.
As Skint still owns the asset at the date of Moneybags’ death, the business asset is eligible for 100% business property relief and no IHT is payable by Skint.
HMRC will only allow business property relief to be claimed on the furnished holiday letting if there was substantial personal involvement by both Moneybags and Skint in the rental business.
Tax planning
Clearly, there are obvious tax advantages with gifting a business asset over the gift of an investment property. In the Advanced Tax exam, you are very often asked to select the most efficient option.
By gifting a business asset, the immediate CGT liability is avoided under gift relief and the asset is tax free for IHT due to Business Property Relief.
You have now understood the CGT and IHT Implications of lifetime gifts and can easily pick up marks on this popular exam topic.
• Neil Da Costa is a Senior Tax Lecturer with Kaplan. He believes in keeping things simple and rigorous exam question practice.
