Gifts – beware capital gains tax may be payable

Whilst gifts are usually given without receiving a payment, that doesn’t exempt gifts from triggering capital gains tax liabilities. Make sure you understand the tax rules that apply to gifting in various circumstances by reading this article.  

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, at first sight, seem unlikely that making a gift could trigger a capital gains tax liability.

However, unfortunately that is not the case and the making of a gift can indeed, in certain circumstances, give rise to a capital gains tax liability.

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.

Example

Maria 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, Maria 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, Maria 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 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.

Tax rules change frequently and whilst this article provides general guidance, it is not tax advice.

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