THE NATURE OF a gift is that it is something that is given to some without receiving a payment in return. Consequently, as nothing is received in return it would seem unlikely that making a gift could trigger a tax liability.
However, as we will see in today’s Shipleys Tax brief, in some cases making a gift could land you with tax to pay.
Gift issues
Many make the mistake of thinking that gifting isn’t taxable. Whilst gifts are usually given without receiving a payment, strangely that doesn’t exempt gifts from triggering tax liabilities. There are tax rules that apply to gifting in various circumstances which, unfortunately, can give rise to a capital gains tax liabilities.
Market value
The making of a gift is a “disposal” for capital gains tax purposes. As the disposal is not by way of an arm’s length bargain (i.e., the price in a free market), the disposal proceeds are 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 and the no gain/no loss rules apply or is exempt from capital gains tax, rather than the donor making a loss equal to the cost of the gift, a gain may be realised instead.
There are tax rules that apply to gifting in various circumstances which, unfortunately, can give rise to a capital gains tax liabilities.
Example
Bella 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, Bella 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 allowance 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, Bella had given it to her husband Akbar, the deemed consideration would be £100 (the value that creates neither a gain nor a loss) and Akbar would be treated as having acquired the painting for £100. In this situation there is no capital gains tax liability on the gift.
Gifts to a charity
Capital gains tax is not payable on a gift to a charity.
Relief for gifts of business assets
The relief for gifts of business assets allows the capital gains tax 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 capital gains tax 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.
Capital gains tax is not payable on a gift to a charity.
Don’t make the mistake of thinking that gifting isn’t taxable. In some cases, Capital Gains tax can still apply as we have seen above.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
