It is clear from this summary that, purely from a tax point of view, Edward should give Anne the yacht rather than the shares.
There will be no tax at the time of the gift. In addition, there will be no tax at the time of death provided Edward survives the gift by seven years. Even if Edward were to die within seven years of the gift, the amount of IHT due on death is likely to be less than the amount due if the yacht were held by Edward until death due to the availability of taper relief. Before concluding on this it would be necessary to consider the chargeable transfers made by Edward during the seven years prior to the proposed gift and the likelihood of the yacht increasing in value.
The situation regarding a gift of the shares is not so straightforward. A lifetime gift will result in a CGT liability of up to £28,000. There is also the possibility of an IHT liability of 40% of the fall in value of Edward’s estate if Edward were to die within three years of the gift. However, there would be no IHT liability if he were to survive the gift by at least seven years.
Retaining the shares until death would avoid the CGT liability but would guarantee an IHT liability up to a maximum of 3.2% of the value of the shares.
Accordingly, a lifetime gift of the shares would be a gamble by Edward. If he were to survive the gift by seven years, the total tax due would be CGT of either £10,000 or £28,000 depending on whether or not he is an employee of Adventure Ltd. If he were to die within three years of the gift, the total tax due is likely to be considerable due to the IHT payable. His alternative is to hold on to the shares and pay a relatively small amount of IHT out of his death estate.
Finally, Edward should be advised that an insurance policy could be taken out on his life in order to satisfy any future IHT liability arising in respect of a lifetime gift.
The following general conclusions can be drawn from the above.
- IHT – Assets which are subject to IHT but not CGT (ie those which are exempt from CGT) can be planned for by reference to IHT only. From an IHT point of view it is, of course, advantageous to give away assets as soon as possible as this opens up the possibility of surviving the gift by seven years or, failing that, the possibility of taper relief. It is particularly important to gift assets that are expected to increase in value as the value on which IHT is calculated is fixed at the time of the gift.
- IHT – Care must be taken when advising on assets that qualify for business property relief or agricultural property relief due to the need for the recipient to hold the assets until the death of the donor in order for the relief to be available on the donor’s death. If it is clear from the facts that the recipient intends to sell the assets gifted, there is likely to be a significant difference between the IHT due on death within seven years of the lifetime gift and that due on the asset when comprised within the death estate.
- CGT – It is not always advantageous to claim gifts holdover relief as this is only a deferral of the gain and thus impacts on the recipient’s base cost for future disposals. Also, the relief is not always available; in particular, unless the gift is to a trust, the assets must qualify for the relief.
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.