Gift Relief - it’s at your disposal
AS an individual, you are liable to capital gains tax on gains made on the disposal of chargeable assets. This can also be the case when assets are given away or sold at less than market value, such as when businesses are being passed from one generation to the next.
A donor can incur a tax liability even in situations where they have no cash proceeds to meet it. Gifts of assets between spouses or civil partners, on the other hand, are usually exempt from capital gains tax unless the couples are separated or separating.
What you may not realise is that Gift Relief can be claimed on the disposal of a number of assets and can represent a significant benefit.
Here are the particular disposals to which it applies:
Any number of shares in an unquoted trading company
A shareholding of at least 5% in a quoted trading company
Assets used in a sole trade or partnership business or in a personal trading company (a personal company is one in which at least 5% of the ordinary share capital is held)
Agricultural land and buildings
Gifts that are immediately chargeable to inheritance tax
Furnished holiday lets
A trading company is a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities.
Substantial is broadly less than 20% no trading activities.
Example
You have decided to retire and let your three sons take over your trading company.
You acquired the shares in your company 20 years ago for £1 and they are now worth £100,000.
You will only receive £1,000 from your sons for the shares, but will be subject to capital gains tax on £99,999 because you have given away the shares
at less than market value to a connected party. Your capital gains tax liability is £9,999, but you only have £1,000 of proceeds out of which to pay it.
Giving away your business for significantly less than it is worth has therefore actually cost you £9,999, £8,999 of which cannot be funded from the sale proceeds and instead are funded from, say, your savings.
Instead, you and your sons jointly elect to claim Gift Relief and defer the capital gains tax liability until your sons may decide to sell the shares.
Your gain is then only £999, representing the difference between the cost of your shares and the proceeds received, which falls within your annual exemption and there is therefore no capital gains tax liability.
The family could also use the relief to control the amount of capital gains tax the father pays by fixing the amount he receives for his shares; by giving away only some of his shares, or a combination of both.
This could be useful if the father needs the proceeds to fund his retirement, but his sons are not in a position to pay full market value.
Furthermore, the family may want the father to continue his involvement in the business, and the father could receive dividends during this time.
How to claim the relief
Relief is claimed by making a joint election with the recipient of the gift within four years of the end of the tax year of the gift.
The election is made on form HS295 and is declared on the donor’s self-assessment tax return.
In the case of a gift to a trustee, only the donor need make the election.
Business Asset Disposal Relief (Entrepreneurs Relief)
Gift Relief can be used in conjunction with Business Asset Disposal Relief (Entrepreneurs Relief) so that gains of up to £1m not covered by Gift Relief (i.e. when partial market value proceeds are received) are chargeable to capital gains tax at just 10%.
Many believe this rate is set to increase in the future, so making use of it whilst it is available could be prudent.
This also has the advantage of increasing the recipient’s capital gains tax base cost.
Other examples of when the relief could be used
Gift Relief can also be claimed when a sole trader or partnership is incorporating and the proprietor or partners dispose of assets to a newly formed company, which would otherwise be chargeable to capital gains tax.
The donee
The donee must be UK resident at the time of the gift.
If the donee decides to emigrate before selling the asset and becomes non-resident and within six tax years of the tax year of gift, the deferred gain is charged on the donee in the tax year of emigration.
If the donee fails to pay the tax, HM Revenue & Customs can collect it from the donor.
Page Kirk LLP have the depth and breadth of knowledge and experience to advise our clients on the tax implications of giving away or selling chargeable assets.
We also provide independent financial advice through Page Kirk Financial Services LLP, enabling our clients to keep more of what they earn and save appropriately for retirement.
If you would like some more information and to find out how we can help you contact us on 0115 955 5500 or email: