Since the recent overhaul of the Inheritance Tax (IHT) rules, many people in the UK are wondering if giving away their assets while they are still alive will reduce the final IHT bill. The answer is somewhat complicated. Apart from IHT, which is the tax you pay on death, there is another capital tax, Capital Gains Tax (CGT), which may also come into play.
Gifting assets can sometimes reduce tax, but it can also trigger unexpected liabilities.
Capital Gains Tax (CGT) on Gifts
Whenever you give away assets (other than cash), HMRC treats it as a disposal at market value, even if you don’t receive money.
The rules will differ depending on who you make the gifts to and whether the assets are a business asset (such as shares in your own company). Business assets attract special relief. What’s more, any investments within the Individual Savings Account (ISA) are exempt from CGT.
And remember, giving away assets to your spouse or civil partner is exempt from CGT and IHT.
Putting these scenarios aside, let’s look at some common types of assets you can give away to reduce IHT.
Cash
Cash is not a capital disposal and therefore does not attract CGT. You can now give this away, and if you survive for seven years, the cash gift will not be included in your Estate.
However, you need to ensure that you have enough money to live on for the remainder of your life.
Here’s other ways you can make smaller cash gifts which are tax efficient.
Shares and Investments
It’s common for many retirees to hold stocks and shares. If these investments are held in an ISA, you can transfer them to your beneficiary, and if you survive for seven years after making the transfer, they will be exempt from CGT and IHT. Alternatively, you could cash them in and use the money as a gift instead.
If you gift shares worth more than you originally paid and not held in an ISA, CGT may apply.
For example, gifting shares now worth £200,000 but originally bought for £100,000 creates a £100,000 gain. After deducting your CGT allowance (£3,000), the remainder could be taxed at 18% or 24%.
Investment Property
Unlike shares, your investment property cannot be held in an ISA. So, if you decide to give this away during your lifetime, it will trigger CGT. As per the example of shares above, you will pay tax on the profit.
This is the case even if you don’t get a penny for it because it is a gift. The sale proceeds are deemed to be the market value at the time of the gift.
If you then survive seven years, the property escapes IHT. If not, if you survive 3 years, there will be availability of taper relief. You can find more details of this works here.
However, be mindful, you will be giving away your investment, the income stream and paying any CGT. This is a triple blow.
Main Residence Relief
Your main home is usually exempt from CGT thanks to Private Residence Relief (PRR)
However, if you’ve rented it out or used it partly for business, part of the gain may still be taxable.
Upon death, your house will be subject to Inheritance Tax (IHT) just like any other assets, and there are no special reliefs available for it.
It may be very tempting to give the house to the next generation, especially if they need the space more. However, it’s important to proceed with caution.
The Trap of Gifts with Reservation of Benefit
A very common mistake is to give away your asset in title (i.e. change the legal name) but continue to benefit from the income.
You might expect HMRC to have anti-avoidance rules in place to address this type of arrangement, and you would be correct. Suppose you haven’t truly given away the assets because you continue to benefit from the rewards they provide. In that case, you will be subject to the anti-avoidance rules known as “Gifts with Reservation of Benefit.”
Let’s look at some common examples:
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Giving Away Your Home
- You transfer your home to your children but continue living there rent-free.
- HMRC will count the property as still part of your estate for IHT purposes.
- Result: the gift fails to reduce IHT liability.
- You could however, pay market rent to your children as you are now living in their legally owned property.
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Other Examples
- Gifting rental property but keeping the rent.
- Gifting shares but continuing to receive dividends.
Conclusion: Is Gifting Assets Worth It?
IHT and CGT share the same category of “capital tax”, but they both operate independently. CGT is charged on capital profits, and IHT is the tax on the capital value at death.
Whilst giving away cash during your lifetime is not an issue if you survive seven years, giving away other assets should be thought through carefully.
Consult with a professional before taking any action. Talk to us or email us at enquiries@myersclark.co.uk
Any chargeable assets transferred during your lifetime can attract CGT at a comparatively lower rate of 18% or 24%. This may seem tempting because tax on death is 40%.
If you pass away within seven years, the same asset may be liable to IHT without regard to any CGT already paid. We suggest prioritising how taxes can be paid upon death and what you can realistically transfer during your lifetime.
Sometimes, taking the right advice and consulting with experts helps.
If you need help reviewing your Estate and planning, we are here to assist.
Here’s how we make you feel calm and confident about your taxes.