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<\/p>\nTo be successful in X Factor a competitor needs at least three yesses to follow their dreams. \u00a0In the world of family giving you need to overcome only two hurdles. \u00a0 That doesn\u2019t necessarily mean that family giving is any easier than progressing through the rounds of X Factor.<\/p>\n
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When one gifts down through the family generations the two taxes which need to be considered are Capital Gains Tax and Inheritance Tax.<\/p>\n
Capital Gains Tax (CGT) is the tax when an individual disposed of an asset, whilst Inheritance Tax can be considered the additional tax on transferring that asset.\u00a0 The Government appreciate that it wouldn\u2019t be right to charge both on a single transaction and therefore there are various reliefs which can be claimed to prevent one of them applying.\u00a0 Ideally there would be no tax on a gift and much succession planning is based around eliminating these taxes.<\/p>\n
Capital Gains Tax is only chargeable on certain assets.\u00a0 A commonly gifted asset which has no CGT implication is gifts of Sterling.\u00a0 You will note that I am very specific about the currency.\u00a0 If a gift is made in a currency other than Sterling then there could be Capital Gains Tax considerations.<\/p>\n
If the gift is of shares in a trading business and the recipient of the gift is a UK tax resident, then there may be the possibility to jointly elect with the donor to holdover or delay the gain element.\u00a0 This effectively means that the donor does not pay any CGT on the gift but the recipient acquires the asset at the same base cost as that applicable to the donor.\u00a0 At best this is a tax deferral as the recipient will pay more tax when they sell the shares.<\/p>\n
If the business is not a trading business it may be possible to undertake a demerger<\/a> to allow a business which would otherwise not qualify for this relief to become qualifying.<\/p>\n Most gifts of assets are potentially exempt transfers (PETs) for Inheritance Tax (IHT) purposes.\u00a0 In simple terms this means that the gift becomes free of IHT should the donor survive seven years from the date of the gift.\u00a0 To be a PET the gift must be unfettered and there has been talk for many years about the risk of HMRC extending the seven year period to something longer.\u00a0 If the donor dies within the seven year window then not all of the gift falls into IHT.\u00a0 The potential liability tapers away within the seven years and it is possible to buy life assurance which would cover the tax should it become payable within that window.<\/p>\n If you pause at that point it would appear that Capital Gains Tax is the primary concern.\u00a0 This is because gifts could potentially be exempt from IHT due to the seven year rule.<\/p>\n Gifts into certain structures can give rise to an immediate IHT charge.\u00a0 In order to prevent both IHT and CGT being payable on the same commercial transaction it is then possible to make a tax election to prevent the CGT being payable.\u00a0 Depending on value and circumstance the IHT may be less than the CGT which would otherwise be payable.\u00a0 This can lead to planning whereby an IHT charge of nil or a modest value is deliberately generated in order to avoid a higher CGT cost.\u00a0 This planning needs to then be tempered with the cost of running the resulting structure or the future cost of unwinding it.<\/p>\n Many trading assets are exempt from IHT.\u00a0 As an alternative to gifting during life and having the recipient take on the donor\u2019s Capital Gains Tax base cost it may be more efficient for the donor to retain the asset and leave it to the recipient in their Will.\u00a0 At death there is no IHT on the trading asset and the asset is transferred to the individual at its market value as at the date of death.<\/p>\n This has led to planning involving business owners and their elderly parents.\u00a0 The business person gifts shares in the family company<\/a> to their elderly parents and holds over the capital gain.\u00a0 The understanding is that the Will of the elderly parent transfers the asset back to their child.\u00a0 With the right fact pattern the death of the parents does not lead to any Inheritance Tax on the shares and the business person reacquires the shares from the estate of their parent with an uplifted base cost of the assets.<\/p>\n You could say that was a yes, yes and yes.<\/p>\nPotentially Exempt Transfers<\/h2>\n
IHT and CGT<\/h2>\n
Gifting shares in a trading businesses in a Will<\/h2>\n