capital gains tax and gifting
Many people believe that Capital Gains Tax (CGT) is only payable on a sale of a property, but this is not correct. It is payable on a deemed disposal of an asset, whether or not money changes hands.
There are 2 types of interests in land, the legal interest and the equitable interest, i.e. beneficial interest. Where the equitable or beneficial interest moves, this is a disposal and potentially chargeable to CGT.
Transferring a property into Trust would trigger a disposal. This could trigger a Capital Gains Tax liability, so be careful! Each of the following should be considered and will also affect the correct recommendation:
- Is the property pregnant with gain? (comparing the ‘base cost’ with the current value)
- Does the client want to benefit going forward? (this will include free occupation or receiving any rent from the property)
- Has the client made any previous gifts in the past 7 years? (gifts into a Trust are chargeable lifetime transfers (CLT’s) for inheritance tax (IHT) purposes)
- What is the property currently being used for? (Is there a CGT advantage to be gained?)
The Mind Blowing Potential of a historical Trust of Land or Implied Trust to evidence gifts
Section 53(1)b Law of Property Act 1925 allows you to confirm a verbal Trust in writing, so provided the evidence speaks for itself, it is possible to immediately remove an asset from a client’s estate for IHT purposes.
For example, mum and dad purchased a house for their son to live in more than 7 years ago and they have not received any rent nor occupied it in that time. They have therefore received no benefit, and a correctly drafted ‘Gift Trust’ style Trust of Land would immediately remove that asset from mum and dads estate. There may be no need to wait 7 years before the value of this asset is removed from their Estate for IHT purposes!
As Mum and Dad are the owners of the property but do not occupy it, there could be Capital Gains Tax payable on the sale of the house. Is there a way of mitigating this?
Note that Section 225 TCGA 1992 allows Trustees to claim Principle Primary Residence Relief (PPR) for an occupying beneficiary - therefore, a Trust containing a property of which a beneficiary (a child) is living in would allow the Trustees to utilise their PPR.
Gifting additional Properties for IHT purposes and deferring CGT
If moving the ‘equity’ will trigger a disposal where a property is pregnant with gain, then how can you dispose of it without the need to pay Capital Gains Tax?
Holdover Relief will allow the disposal but defer the Capital Gains Tax until the later sale. The effect is that the Trustees will inherit the property at the base cost to the client, i.e. there is no ‘uplift’ in the hands of the trustees.
If the Settlor(s), for example Mum and Dad, cannot benefit, then this will start the clock for IHT purposes. Once 7 years has passed from the date of the gift, the asset will not be in mum and dad’s estate for IHT and in addition, as it is in a discretionary Trust, it will not be in the estate of the child or children for the calculation of IHT.
Where it is not possible to claim PPR uplift, for example, the property is a rental property, it is possible to also hold over the gain on the way out of a Trust too.
As an example, mum and dad could holdover the gain when the property is transferred into the Trust, and then the trustees could appoint the property out to, say, 4 children and again, holdover the gain.
The advantage here is that you have 4 allowances for Capital Gains Tax, so less Capital Gains Tax to be paid, but note that you have increased the value of the children’s estates here, and the asset is owned personally for the purposes of divorce, creditor claims etc.
Having your cake and eating it!
No doubt you will see clients who are asset rich and comparably cash poor, so there is an IHT liability to reduce, but perhaps the assets causing the liability are rental properties of which mum and dad require the income for.
Noting the gift with reservation rules, I can’t give something away and retain a benefit, or can I?
Can clients have their cake and eat it? YES!
Using Section 102(b)3 FA 1986, we can gift an undivided share of the clients property, allowing them to retain ALL of the rent and this will NOT be a Gift with Reservation of Benefit.
If there are gains in the property, then we can declare a Trust over 50% of a property into a Holdover Gift Trust. Retaining a share is important to mitigate any gift with reservation of benefit.
If you would like to learn further information about Capital Gains Tax and Gifting, please don't hesitate to contact us via firstname.lastname@example.org, or call us on 01926 514 390.
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