Q&A: CGT and gifts

In our regular Q&A series from Croner Taxwise, tax adviser, Ibrahim Nalla explores the implications of capital gains tax on gift giving after compliance changes which will apply from April 2020

Q. My client wants to gift property to her children during their lifetime but does not want to use a trust. What are the main capital gains tax (CGT) implications particularly in view of the compliance changes applying from April 2020?

A. A gift is a disposal for capital gains tax purposes. Furthermore, a gift from an individual to his/her children would constitute a disposal to a connected person as defined in s286 Taxation of Capital Gains Act (TCGA 1992) and so the deemed proceeds is the asset’s market value under s18 TCGA 1992

CGT due on direct disposals of UK residential land by UK residents from April 2020 will be reportable and payable within 30 days of the completion date – Sch2 Finance Act 2019. This change is likely to create compliance and cash flow difficulties for many.

To assist with cash flow, clients who have an immediate CGT liability can make an election to pay the CGT in 10 annual instalments with the first instalment being payable on the normal due date. The legislation can be found at s281 TCGA 1992 and for gifts, the rules are as follows:

The instalment provisions apply to assets which are disposed by way of gift where s165 TCGA 1992 or s260 TCGA 1992 cannot be claimed or where they have been claimed, have not been enough to defer the gain or in limited circumstances, where gift relief has been clawed back.

The assets on which relief is available are as follows:

•land, or an estate or interest in land;

•a controlling shareholding of a company’s shares or securities; or

•shares or securities not comprising a controlling interest, but which are not listed on a recognised stock exchange. Shares traded on the Alternative Investment Market (AIM) do not fall under this definition Capital Gains Manual 50255 (CG50255)

The instalments include interest which runs from the normal due date and is compounded on the unpaid portion of the tax. The taxpayer can pay off any part of the outstanding balance at any time.

There is the risk of any unpaid instalment becoming due immediately, with accrued interest if the asset gifted to a connected person is later disposed of for valuable consideration.

Therefore, the asset gifted to your client’s children should not be disposed of for consideration during the instalment period otherwise all remaining instalments become due and payable.

The taxpayer must give notice to HMRC in writing and HMRC state at CG66452 that this can be made at any time before the tax becomes payable.  If accepted, the tax can be paid by ten equal yearly instalments the first of which is due on the day the tax would have been payable.

Where the property is disposed of before 6 April 2020, CGT is generally payable under self-assessment and payable on 31 January after the end of the tax year of gift. This leaves plenty of time to make the election.

The above-mentioned 2020 changes will create a practical problem in giving notice before the tax becomes due. Where a property is disposed of on or after 6 April 2020, a CGT return and the tax payment must be made within 30 days of the completion date – a much shorter notice period for the instalment election.

Even for those taxpayers within self assessment, a CGT return and payment is still required unless its filing date falls after the date someone has either already filed a self-assessment tax return or is due to submit a self-assessment return (this latter date is usually 31 January after the tax year unless a notice was issued late by HMRC).

There are exceptions to the CGT return requirements eg, no gain/no loss transfers and gains wholly covered by Principal Private Residence relief. However, in view of the 30-day compliance deadlines, it will be important that clients are aware they must contact their agents early in the disposal process if they need assistance.

About the author

Ibrahim Nalla, tax adviser at Croner Taxwise, tel: 0844 892 2470

This article first appeared on Croner Taxwise

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