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Gifting assets to your spouse or children is a common way to pass on wealth and potentially reduce your tax burden. However, it’s crucial to understand the implications of Capital Gains Tax (CGT) and Inheritance Tax (IHT) to ensure your gifts are tax-efficient. This blog post explores the key considerations.
Gifts to Spouse/Civil Partner:
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Capital Gains Tax (CGT):
- Gifts between spouses or civil partners are generally treated as “no gain, no loss” disposals for CGT purposes. This means that no CGT is payable at the time of the gift.
- The recipient spouse inherits the original purchase price and date of acquisition of the asset.
- When the recipient spouse later disposes of the asset, they will be liable for CGT on any gain accrued from the original purchase date.
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Inheritance Tax (IHT):
- Gifts between spouses or civil partners are generally exempt from IHT.
- This means you can transfer assets of any value to your spouse or civil partner during your lifetime or upon your death without incurring IHT.
- The surviving spouse can also inherit any unused portion of the deceased spouse’s Nil Rate Band, further reducing potential IHT liability.
Gifts to Children:
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Capital Gains Tax (CGT):
- Gifts to children are treated as disposals for CGT purposes. This means you may be liable for CGT on any gain accrued on the asset at the time of the gift.
- You can utilize your annual CGT allowance to reduce or eliminate the tax liability.
- If the asset increases in value after the gift, the child will be liable for CGT on any subsequent gains when they dispose of it.
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Inheritance Tax (IHT):
- Gifts to children are potentially subject to IHT.
- Potentially Exempt Transfers (PETs): Gifts made to children are considered PETs. If you survive for seven years after making the gift, it will generally be exempt from IHT.
- Taper Relief: If you die within seven years of making the gift, the IHT liability may be reduced through taper relief, which reduces the tax payable based on the number of years between the gift and your death.
- Annual Exemption: You can gift up to £3,000 per tax year to your children without it being included in your estate for IHT purposes.
- Small Gifts Exemption: You can make small gifts of up to £250 per person per tax year.
- Gifts Out of Surplus Income: Regular gifts made from your surplus income are exempt from IHT, provided they don’t affect your standard of living.
Reducing Tax Liabilities on Gifts
To minimize tax exposure when gifting assets, consider:
- Annual IHT Gift Allowance – You can gift up to £3,000 per year tax-free.
- Small Gifts Exemption – Gifts up to £250 per person per year are exempt from IHT.
- Gifting Over Time – Spreading gifts across multiple tax years can reduce CGT exposure.
- Using Trusts – Trusts can help manage tax-efficient wealth transfers to children.
- Gifting Out of Surplus Income – Regular gifts from excess income (not capital) can be IHT-free.
Key Considerations:
- Timing: The timing of gifts is crucial for both CGT and IHT planning.
- Record Keeping: Maintain accurate records of all gifts, including dates, values, and recipients.
- Asset Valuation: Accurately value assets before gifting to ensure proper CGT and IHT calculations.
- Trusts: Consider using trusts to manage gifts to children, especially if they are minors or you want to maintain some control over the assets.
- Business Assets: Business assets may qualify for Business Property Relief (BPR), which can significantly reduce IHT liability.
- Gifting Property: Gifting property can have complex CGT and IHT implications. Seek professional advice before gifting property.
- Clarity of Intent: Ensure the gifts are clearly documented and reflect your intentions. This is especially important for IHT purposes.
Strategies for Tax-Efficient Gifting:
- Utilize Annual Exemptions: Maximize your annual CGT and IHT exemptions.
- Stagger Gifts: Spread gifts over multiple tax years to minimize tax liability.
- Consider ISAs: Utilize ISAs to shield investments from CGT.
- Pension Planning: Pension death benefits are often outside your estate for IHT purposes.
- Life Insurance: Consider taking out a life insurance policy written in trust to cover potential IHT liabilities.
- Seek Professional Advice: Consult with a financial advisor or solicitor specializing in tax planning.
Final Thoughts
Gifting assets to your spouse or children can be an effective tax planning strategy, but understanding the implications of CGT and IHT is crucial. Seeking professional tax advice can help you optimize your gifting strategy while minimizing tax liabilities.
