Chris Thorpe looks at what happens for tax purposes when making lifetime gifts.
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This is a sample article from our property tax saving report - Inheritance Tax: Key Strategies And Insights Explained
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The Oxford English dictionary defines a gift as: ‘something, the possession of which is transferred to another without the expectation or receipt of an equivalent’. The gift of an asset is thus not an arm’s length sale in return for market value proceeds, nor a loan or investment – it is entirely unilateral.
For capital gains tax (CGT) purposes, a gift is treated as a disposal alongside a sale; inheritance tax (IHT) only applies to gifts. For IHT purposes, lifetime gifting can be used to reduce the value of one’s estate upon death.
What is a gift?
When both the legal and beneficial ownership of an asset passes to the recipient, the transaction is complete. The beneficial ownership generally follows the legal ownership, and for a gift of land, that is the presumption (LPA 1925, s 60(3)); but for other assets, the beneficial ownership is presumed to remain with the donor unless that is rebutted by evidence that a gift was intended – this scenario is a ‘resulting trust’. Thus, when gifts of other assets are made, it is good advice to have some simple, informal evidence that a gift was the motive behind the transfer.
As well as gifts to an individual, gifts (or ‘settlements’) can be made into trust; although failure to properly establish an express trust will also lead to a resulting trust.
Gifts for tax purposes
Assuming that the beneficial ownership has been transferred to the recipient, there are tax consequences for both CGT and IHT purposes.
For CGT purposes, a disposal includes a gift with market value proceeds being deemed as received – this will result in a ‘dry’ tax charge, as CGT is payable even though there are no actual proceeds from which to pay it. Some assets are exempt from CGT – cash being a common example, along with machinery held for non-business use and one’s only or main residence. Holdover relief is available if the asset gifted is used in the donor’s trade – this defers the capital gain until it is sold by transferring the base cost to the UK-based recipient. Holdover relief is also available for any asset when an IHT charge arises – usually when placed into or leaving a trust.
For IHT purposes, the value of the gift is measured by the reduction of value in the donor’s estate. Once gifted or settled into trust, value only leaves their estate after seven years – should the donor die within that time the gift ‘fails’ and remains in their estate. When gifts are made to individuals, it is a potentially exempt transfer (PET), meaning there is no tax charge unless the donor dies within the next seven years. Any other gift (usually into trust) is a chargeable lifetime transfer, meaning there is an immediate IHT charge (measured against the available nil-rate band); after seven years, there would be no further charge. Should the donor die after three years, the tax rate on a failed gift is tapered down.
Reliefs are available for IHT purposes too. For lifetime gifts, there is an annual £3,000 exemption as well as a small gifts allowance of £250 to an unlimited number of people or in consideration of marriage. Agricultural and business property reliefs (APR or BPR) are available for lifetime gifts, as well as for a deceased’s estate upon death. Assets which qualify for these reliefs mean that the value of a gift is effectively nil; whilst these reliefs are unlimited, from April 2026, the limit is £1m per person. Under draft proposals within the Finance Bill 2024-25, a gift made before 30 October 2024 will qualify for unlimited APR or BPR if the gift fails; gifts made after 30 October 2024 will only attract unlimited relief if the donor dies before April 2026.
Practical tip
Gifts of assets other than land should accompany written confirmation that a gift was intended to ensure the beneficial ownership is transferred. Unless the asset is used in a trade, a gift to an individual will result in a CGT charge, as well as a potential IHT charge.
