Tax efficient gifting – a silver lining of COVID-19
If there is a silver lining in the current economic situation caused by the pandemic it might be that it creates opportunities for tax efficient gifts to be made. Suppressed asset values mean that assets can be passed to younger generations without tax consequences which might, in a more normal climate, be unattractive. But proper planning remains essential, and here are some things to think about:
1. What can I afford to give away?
The first stage in any plan to give away assets must involve assessing what you can afford to give away. Where asset values are reduced, so are income yields, so donors will need to look carefully at what they need to retain to support their lifestyle now and into the future. If nothing else, the pandemic has highlighted that the future can be very uncertain and so a cash-flow planning exercise to stress test possible future scenarios is important both for confidence in being able to part with assets, and to identify what or how much to give.
2. Can I afford to give those assets away forever?
It is important to bear in mind that whatever you give away, you must be prepared to live without forever after. Attempting to retain some benefit from a ‘gift’ (particularly commonly with gifts of properties) is often caught by anti-avoidance rules which can work in very punitive ways. There are certain arrangements which can successfully prevent the operation of these ‘reservation of benefit rules’ but the practical implications have to be carefully weighed against the tax savings on offer.
Affordability is not just a financial consideration either, particularly where interests in family businesses are concerned. Tempting as it may be to give away shares in a business while values are lower, the impact of this on the control of that business will be an important factor too. It might be worthwhile considering arrangements which pass on value without divesting voting power at the same time, for example through creating different classes of shares.
3. What are the inheritance tax implications?
A gift from one individual to another will not attract inheritance tax provided the donor lives a further seven years from the date of the gift. There may be good reasons to start that seven year clock running as soon as possible; not only does the rate of IHT taper down from its headline 40% the longer the donor lives, but any tax will be assessed on the value of the asset at the time it was given away. Should assets values start to lift as the pandemic hopefully eases, that growth in value will be in the recipient’s estate immediately.
Thought needs to be given to the possibility that any gifts will become subject to IHT. The recipient can find themselves with an unexpected inheritance tax charge on their gift, and this can cause liquidity issues particularly where, for example, a child receives funds from a parent to purchase a property. It might be worth considering changes to the donor’s will to deal with this issue, or taking out policies of life insurance to cover any tax charge which arises. Again, as the tax charged will be assessed on the value of the asset at the point of gift, the level of cover required and thus the cost will hopefully be reduced correspondingly.
Another angle to the IHT considerations is whether it would be worth locking in any available reliefs or exemptions from IHT while they are available. Even before the pandemic, consultations and views on the reform of certain aspects of IHT were being published, with changes to both Business Property Relief and lifetime gifting widely thought likely. On any analysis, and with the current situation overlaid, those aspects of IHT are not likely to become more generous, so securing those reliefs while they are available in their current form may prove a sensible hedge against future changes in the tax regime.
4. And what about Capital Gains Tax?
CGT is as much a consideration as IHT when making gifts, which is often a surprise to would-be donors. However, depressed asset values mean the gain realised when an asset is given away will be lower, and so any charge to CGT will be reduced in turn. This can be attractive, particularly in the case of gifts where the charge is ‘dry’ i.e. the disposal of the asset does not produce cash with which to pay the tax in the way that selling an asset would.
Where assets are standing at a loss for CGT purposes then thought should be given to whether those losses can be offset against gains in the current year, or carried forward for future years. This may prove beneficial should the rate of CGT rise from its current position; a possibility which seems increasingly likely.
5. Are my intended recipients ready, willing and able to receive the gift I want to make?
Regardless of any tax efficiencies, it rarely makes sense to give valuable assets to those who are at the wrong age or stage in life. Financial immaturity, relationship issues or the threat of creditors may make it sensible to try to protect the gift in some way. Careful thought should be given to an appropriate structure that achieves a balance between control, ease of administration and tax.
Depressed asset values might mean that it is easier to add more value to a trust than it otherwise would have been. Those who are UK resident and domiciled and do not wish to trigger lifetime inheritance tax charges will find that they are limited to adding a maximum of £325,000 to a trust (£650,000 between a married couple) or more where assets qualify for a specific relief from tax such as Business or Agricultural Property reliefs.
A trust will not always be the solution however, particularly for those more familiar with a corporate environment. In such cases, a family investment company or family partnership might be more suitable. There is no one solution that fits all circumstances, so proper planning and advice is key.
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