The nature of a gift is that it is something that is given to someone without receiving a payment in return. Consequently, as nothing is received in return it initially seems unlikely that making a gift would trigger capital gains tax on gifts.
However, unfortunately that is not the case and the making of a gift can indeed, in certain circumstances, give rise to a CGT liability.
Market value
The making of a gift is a disposal for CGT purposes. As the disposal is not at arm’s length (i.e., the price in a free market) special rules apply. The disposal proceeds will be the market value at the time the gift was made, rather than the amount received by the person making the gift (i.e. nothing). From a capital gains tax perspective, unless the gift is to a spouse or is exempt from capital gains tax, a gain may be realised instead.
Example
Dolly has a painting which her niece has always loved. She purchased the painting many years ago for £100. The artist is currently very popular and the painting is now worth £20,000.
On giving the gift to her niece, Dolly is treated as if she had disposed of the painting for its market value of £20,000. Consequently, she makes a capital gain of £19,900. Assuming her annual exemption of £12,300 remains available, she must pay capital gains tax on a gain of £6,800.
Gifts to spouses/civil partners
Transfers between spouses are deemed to be at a value that gives rise to neither a gain nor a loss. If instead of giving the painting to her niece, Dolly had given it to her husband David, the deemed consideration would be £100 (the value that creates neither a gain nor a loss) and David would be treated as having acquired the painting for £100. In this situation there is no CGT liability on the gift.
Gifts to a charity
CGT is not payable on a gift to a charity.
Relief for gifts of business assets
The relief for gifts of business assets allows the CGT that might arise on the gift of a business asset to be deferred by ‘rolling over’ the gain so that the recipients base cost is reduced by the deferred gain. However, while this means that there will be no CGT to pay at the time of the gift, the recipient will realise a larger gain when they dispose of the asset. The relief effectively shifts the liability from the donor to the recipient.
At DRS, we pride ourselves on working closely with our clients and offer a proactive service. If you are thinking of gifting assets, get in touch with us to discuss if there could be any capital gains tax on gifts you are thinking of making. Get in touch by email (info@drs-tax.com) or by the contact us form on our website at www.drs-tax.com