Enter Your E-mail

TaxationWeb by Debbie Bray

Debbie Bray of LexisNexis Tolley Tax Training outlines the tax treatment of gifts.Tax examiners live in a different world to you and me. A fictitious world where clients are extremely generous folk who regularly give shares in their businesses to their family, antique vases to their grandchildren, cash to discretionary trusts, and gift aid donations to charities.

This article will therefore examine the subject of gifts by establishing a few basic principles – a decent grasp of these will accrue good marks in any tax exam. Gifts are a highly examinable area as the examiner does not need to confine himself to one tax in isolation – a gift can have income tax, CGT and IHT consequences and it is not against the rules to test all three in one question.

This article is not the 'be all and end all' as far as the tax implications of gifts are concerned. It is more of a 'memory-jogger' or 'reference-point' on which you can build.

Income tax

Gifts only have an income tax implication if the recipient of your generosity is a UK registered charity. Gifts to non-charitable orgnaisations will not affect the tax computation.

There are a number of ways in which income tax relief can be obtainied on charitable donations.

Gifts of cash

If the donation is accompanied by a Gift Aid declaration, the donor obtains income tax relief. Basic rate (22%) relief is given at source as the donation is treated as being net of tax. Higher rate relief is obtained by extending the basic rate band by the gross amount of the donation.

Gifts of assets

If a taxpayer gives quoted shares or land and buildings to a UK charity, relief is obtained by treating the market value of the shares (plus any disposal costs) as a charge on income in the computation. We simply deduct the charge from non-savings income and pay tax on the balance. The basic rate band is not extended.

Capital gains tax (CGT)

This is the area where gifts are most regularly tested and where students have the most misconceptions. First let me make 5 general statements with regard to CGT on gifts;

1. A gift of cash has no CGT implications;

2. A gift of assets between spouses (or 'Civil Partners') living together takes place at 'no gain, no loss';

3. A gift of assets between non-spouses takes place with proceeds deemed to be the market value of the asset gifted;

4. Gift relief is not automatically available on all gifts. It only applies if certain conditions have been satisfied and a claim is made;

5. Gift relief does not make gains disappear completely – it merely defers the gains to a later period of time.

Let’s examine these in more detail.

1. Hopefully this is self-explanatory. Cash is not a chargeable asset so no gains can arise on its disposal.

2. The 'no gain, no loss' rule only applies between spouses up to and including the end of the year of separation (if applicable). The market value of the asset (if given in the question) has no bearing on your answer.

The recipient spouse is deemed to have bought the asset from the donor spouse for such an amount so as to give a gain of exactly nil – ie, for cost plus indexation to the date of the gift (or April 1998). This will give us the base cost of the recipient spouse so that we can calculate gains on a future disposal. We can add the ownership periods together for taper relief purposes.

3. All gifts between non-spouses take place with proceeds being equal to market value. There are no exceptions to this. The first thing you should do therefore is to work out the capital gain using the market value figure given to you in the question.

Once we have the gain, we can think about what to do with it. There are 2 choices;

(a) the donor pays tax on it; or

(b) the donor doesn’t pay tax (by claiming gift relief). More later.

If the calculation gives rise to a loss (ie, cost is higher than the value of the asset at the date of gift), relief for the loss is generally restricted. Losses on transactions between “connected persons” can only be used against gains on disposals to the same connected person in the same or future tax years.

4. Gift relief is available if the donor claims relief under either s 165 or s 260 of TCGA 1992. Gift relief must be claimed, usually jointly by the donor and the donee – it is not given automatically. The donee must be UK resident when the gift is made.

Relief under s 165 can only be claimed if the assets being given away are 'business assets'. Business assets include;

(i) shares in unlisted trading companies (any number);

(ii) shares in quoted trading companies where the donor had at least 5% of the shares at the date of the gift (ie, it was his “personal company”);

(iii) assets used in a business carried on by a sole trader or partnership, or assets owned by an individual and used in his “personal company”;

(iv) furnished holiday lets;

(v) farmland.

Relief under s 260 can only be claimed if the recipient of the gift is a discretionary trust. In this instance, relief is available for gifts of any asset.

Therefore, if an individual gives a non-business asset to another individual, there is no gift relief. The donor will therefore apply taper relief to his gain (usually at the non-business rate), and then pay tax on it in the normal way. The fact that he has no proceeds is irrelevant – the gain is still taxable and CGT will be due.

The donee is deemed to have bought the asset for its market value at the date of the gift. That market value is his base cost going forward. The donee will get taper relief from the date of the gift – we cannot aggregate ownership periods in this instance.

5. Gift relief defers a gain by 'rolling over' the gain against the base cost of the recipient. We always roll-over before taper relief, so a full roll-over will lead to taper relief being lost.

The recipient’s base cost is therefore the market value of the asset, less the rolled-over gain.

These are the basic rules and a decent grasp of these rules will get you most of the marks in an exam question. There are other rules you need to be aware of, such as;

(i) the restriction in gift relief where shares are given away and the company has non-business assets on its balance sheet;

(ii) the restriction in gift relief where the donee buys the asset at less than its market value;

(iii) the strange concept of only rolling-over 50% of the gain where the asset gifted was acquired before March 1982 and given away between 1982 and April 1988.

These are 'icing on the cake' marks and should be looked at when the general concept of CGT on gifts is firmly cemented.

Inheritance Tax

Gifts will have IHT implications. Again, here are some general principles:

1. The gift will be a chargeable transfer for IHT if it is made to a discretionary trust. The type of asset is irrelevant. IHT may therefore be payable if this transfer (plus others in the last seven years) have exceeded the IHT nil band (£285,000 for 2006/07).

2. The gift will be exempt from IHT if made to a spouse or charity.

3. The gift will be a Potentially Exempt Transfer (PET) if made to anyone else (eg, another individual or a non-discretionary trust). IHT will only be payable if the donor dies within 7 years of the gift. If he doesn’t, the transfer becomes exempt.

4. Business Property Relief (BPR) will be available to reduce the transfer of value for IHT purposes if the asset gifted constitutes “business property”. Remember - gift relief defers capital gains for CGT, while BPR reduces transfers for IHT.

BPR is given automatically if;

(i) the asset gifted is “relevant business property”; and

(ii) the donor had owned the asset for at least 2 years before the gift.

Relevant business property is;

(i) shares in unlisted trading companies (any number); or

(ii) a business or partnership share: or

(iii) shares in quoted trading companies where the donor had more than 50% of the shares at the date of the gift; or

(iv) land/buildings or plant/machinery owned by an individual and used either by his partnership or by a company he controls (> 50%).

You will find these assets listed in s 105 IHTA 1984.

For gifts of assets at (i) and (ii) above, BPR is given at 100%. This means that the chargeable transfer or PET will be entirely covered by BPR so IHT is unlikely to be payable. For gifts of assets at (iii) and (iv) above, BPR is available at 50%.

5. Agricultural Property Relief (APR) works in the same way as BPR by reducing a PET or chargeable transfer on a gift of farmland or farm buildings. APR is usually given at 100% but can be given at 50% where;

• the land is tenanted (ie, let out to a farmer);

• the lease was signed before September 1995; and

• the lease had more than 2 years to run at the date of the transfer.

A final point to remember about gifts of business or agricultural property. If a donor gives away a business asset or farmland and dies within 7 years, the PET will be chargeable, but the donee will only get BPR or APR to reduce / extinguish the tax if he/she still owns the asset at the date of the donor’s death. A sale of the asset by the donee may result in no BPR or APR being available. Relief is preserved if the donee sells the asset and uses the proceeds to acquire replacement business or agricultural property.

Debbie Bray
June 2006

Debbie Bray is a member of the tax training team at LexisNexis Tolley where she lectures and writes material for ATT & CTA courses, and audio visual CD ROMs for the student training market. Debbie can be contacted via the Tolley Tax Training website at www.tolleytraining.co.uk.

"LexisNexis Tolley® Tax Training" provides quality correspondence, classroom and e-training for the ATT, CTA, AIIT and ADIT examinations. In addition their e-learning package "Tolley’s Tax Tutor" is excellent preparation for anyone studying tax for any professional examination (ACCA, ICAEW, ICAS, AAT etc). For further information please click the following link: www.tolleytraining.co.uk or email your query to taxtraining@lexisnexis.co.uk