The economic downturn caused by the pandemic has certain advantages that you may wish to consider now. Are you thinking about assisting a family member who has lost their job and is currently experiencing financial difficulty? Gifting money to family members would not give rise to Capital Gains Tax (‘CGT’), but it may assist your Inheritance Tax (‘IHT’) position.
Each of us is given a threshold of £325,000 (known as the nil rate band) whereby our estate has no IHT liability. Any gifts that you make could decrease your nil rate band but here are some exemptions that you might wish to consider.
Your annual exemption of £3,000 allows you to make gifts up to this amount per tax year. If you have not used your allowance for the previous tax year, this means that you could make gifts of up to £6,000 without IHT implications;
You could make small gifts of up to £250 per person per tax year;
If you have excess income, you could make gifts out of your pensions, earnings or investment income with no restrictions on the amount;
Political or charitable donations could be made to organisations of your choice;
Wedding or civil ceremony gifts of up to £5000 per child, £2500 per grandchild and up to £1000 per person.
It is also worth noting that some asset values are lower than they were before the pandemic. If you wish to make gifts of shares or property, transfers made during this time could save you money on CGT and IHT.
If there is a gain in the value of the asset, at the time the gift is made from when the assets were acquired, the gift may be subject to CGT. However, the current downturn means that the market value of assets may fall. This means that gifting assets may attract little or no CGT. However, please note that if values rise, the recipient may face a higher CGT liability.
Where IHT is concerned, any gifts that you make to others may be subject to IHT if you died within 7 years. It is the value of the gift at the time it was made that is taken into account and not the value at the date of death. This means that when the economy recovers in a few year’s time, it is the value of the gifts made at today’s date that will be considered and your tax position will not be affected.
If you are thinking about gifting assets into a Trust, assets that are valued over the nil rate band (if they do not qualify for relief) will be subject to lifetime IHT. If you died within 7 years, the value of the gift will be used to calculate the tax on your death. As values of assets are currently lower, you could consider transferring more assets in a Trust within the nil rate band.
You do not have to pay CGT on any gains when assets are transferred into the Trust. Such gains could be held over. The Trustees would acquire the assets at the cost that you paid for them and CGT would be due to be paid by Trustees when the assets are disposed of later on.
If you choose to pay CGT on the assets transferred into the Trust now. When the Trustees dispose of the assets later on, they will pay less tax because the acquisition cost would be lower at the date of transfer.
You may wish to consider making gifts now if your property, investments or business has fallen in value, while the future is still unclear.