How to Avoid Capital Gains Tax When Gifting

 A capital gain that results from the sale of almost any asset is subject to taxation under the capital gains regime. A disposal includes a sale or a gift. In this video, Malcolm Finney walks you through the steps of utilising Gift Relief to get out of paying capital gains tax on gifts you give to your family.

Making a Gift

The issue that arises when a gift is given (other than when it is given between spouses) is that the person who makes the disposal does not receive any monies out of which to pay any potential capital gains tax (which is currently charged at an 18 percent rate) (the gift is treated as a sale at market value).

Because of this, it's possible that members of the family will be less inclined to give gifts as part of any family tax planning mitigation activity.

Gift relief is an attempt to alleviate this issue; it allows the capital gain (and consequently any tax liability) that is deemed to arise to be postponed as a result of the transaction. This is accomplished by essentially giving the recipient of the gift the right to claim the capital gain as their own.

Example 1

In the trading company ABC Ltd., Dad is the owner of unlisted ordinary shares. The gifting of the shares to the son is the father's desired course of action. The initial cost of purchase for the shares was 10,000 pounds. The value of the shares as of the time of the gift is forty thousand pounds. The amount that Dad owes in capital gains tax is equivalent to 18 percent of £30,000. (ignoring the annual exemption).

Both the father and the son are in agreement to file a claim for gift relief (see below). As a direct result of this, the son is regarded as now being the owner of shares that had a base cost to him of £10,000 (i.e. £40,000 minus £30,000), and the father is regarded as having effectively sold the shares for this amount (i.e. no capital gain).

After some time, Son sells the shares for a total of £55,000. The growth in value during the son's ownership period of £15,000 brings the total capital gain for the son to £45,000 (which is comprised of Dad's initial deferred capital gain of £30,000 and the growth during the son's ownership period).

The prerequisites necessary to qualify for gift tax relief

Unfortunately, not all types of gifts qualify for the tax relief that comes with making a gift. It is relevant if/when:

• the gift consists of a valuable asset to the company; and/or
• Because of the gift, there will be an immediate obligation to pay inheritance tax.

1. Business Asset

Shares in trading companies that are not listed on a public exchange, shares in trading companies in which the donor owns at least 5 percent of the total shares outstanding, and assets used in a trade that is carried out by the donor all qualify as business assets.

2. Possibility of Being Subject to the Inheritance Tax

The "immediate liability to inheritance tax" condition is met even though the liability may be at 0 percent (instead of 20 percent) because, for example, the quantum of the gift falls within the individual's nil rate band (which is equivalent to £325,000 for 2008/09), and this is true regardless of the nature of the asset. In addition, the "immediate liability to inheritance tax" condition is met even though the liability may be at 0 percent (instead of 20 percent) (business or not).

Therefore, gifts between individuals that do not result in an immediate charge for inheritance tax cannot satisfy this condition; however, gifts into (or out of) the majority of trusts would typically satisfy this condition. Therefore, gift relief does not apply to gifts that are exchanged between individuals and do not involve business assets.

Alternate Occurrences

In addition to the preceding conditions (1) and/or (2) being met, it is necessary for the following to take place:

• both the giver and the recipient need to be based in the UK at the time the gift is given; and
• a written claim that must be submitted by both the donor and the donee (unless the gift is into trust, in which case only the donor needs to claim).

Death

Any potential future capital gain that is postponed thanks to gift relief might, in the end, be completely nullified (thus turning deferral into avoidance).

Example 2

In the first example, if the son had passed away while still being the owner of the shares he had received from their father, the aggregate gain of £45,000 would not have been subject to capital gains tax (death does not give rise to capital gains tax charges).

In addition, we have an Accounting website with the domain name Accotech, which provides best accounting services in Islamabad. Taxation, bookkeeping, payroll, VAT, and other accounting services are available in the Website.