Common Misconceptions – Gift of Property or Assets: Tax Implications
When you are giving a valuable gift, such as an antique, family heirloom, cash, shares, or more expensive asset such as a house, you don’t really expect to have to pay anything. Yet depending on the circumstances – what the asset is, how much it is worth – there may be a tax liability to pay, even if no cash changes hands.
There are two main taxes to consider in situations like these – Capital Gains Tax (CGT) and Inheritance Tax (IHT). In addition, if you are gifting property, then Stamp Duty Land Tax (SDLT) will also factor.
Capital Gains Tax
Whether there is any tax to pay will be determined by whether the disposal is considered chargeable or exempt. The following are always exempt:
– Cash
– Your car
– Stocks & shares in tax-free holdings (such as ISA Accounts)
– Betting or Lottery winnings
– Personal injury compensation
– Personal possessions (e.g. jewellery, antiques, paintings) up to £6,000 in value.
– Personal possessions worth more than £6,000 if a) it has a useful life of less than 50 years, AND b) it hasn’t been used in your trade or job.
All other asset disposals may be chargeable; it will depend on the exact circumstances.
Inheritance Tax
There are two things to consider with IHT. Firstly – gifts to your spouse or civil partner, qualifying charities, certain museums, universities or the National Trust, or a UK political party are exempt from Inheritance Tax. Secondly, the ‘Seven Year Rule’ – any gifts made will be exempt from IHT if you live for seven years after making the disposal. Small gifts of up to £3,000 per person are also exempt.
Any gifts or transfers that aren’t exempt will contribute to the value of the estate. There will be no IHT to pay up to the estate value of £325,000. Anything in excess of this will incur tax at a rate of 40%.
Any ‘unused’ allowance on the death of one spouse is transferred to the other, to increase their allowance.
Example 1:
Mary is 65 and widowed. Her house is worth £1,000,000. When her husband David died, he left the whole amount in his will to her, so Mary has a total tax-free amount of £650,000 to use.
She decides that for tax-planning purposes, she will transfer the house to her son, James, and retire to a smaller cottage near the house. Will there be any inheritance tax implications?
If she lives to at least 73, there will be no inheritance tax to pay, due to the 7 year rule.
If she dies before then, then James will have to pay inheritance tax on the property. The total inheritance tax due on the house (outside of any other assets in the estate) will be
(£1,000,000 – £650,000) * 40% = £140,000.
There is an important concept called the ‘gift with reservation’. This basically means that if you gift an asset to someone, but continue to have extensive use of it, then the seven year rule does not apply. For most assets, this does not apply – such as an antique painting, for example. However, for a house, this is more likely to be a consideration.
Example 2:
James suggests that his mother, instead of moving to the smaller cottage, continues to live in the house.
The house is now considered a ‘gift with reservation’, and will continue to be a part of the estate and inheritance tax will be due on Mary’s death. However, if Mary pays market rent to James, then it does not fall under the ‘gift with reservation’ rules.
Stamp Duty
Generally, property that is gifted is exempt from Stamp Duty Land Tax. However, if there is an outstanding mortgage on the property, and the recipient takes over any part of that existing mortgage, then SDLT may be payable.
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