For CGT purposes a gift made by an individual is treated as a disposal even though no money changes hands. The disposal is valued at the market value (MV) of the gifted asset at the time of transfer. The base cost of the asset is deducted from the market value to calculate the capital gain.
For example, if a father gifts shares in a company to his son without receiving any consideration, the transfer triggers a CGT liability for the father.
Illustration:
Market Value of shares £200,000
Cost (£120,000)
Capital Gain £80,000
In this example, if the father is a higher-rate taxpayer, he would face a CGT charge of 24% on the £80,000 gain, amounting to £19,200.
However Gift Relief allows the gain to be deferred. The deferred gain is effectively deducted from the base cost of the asset in the hands of the recipient (donee). In the above case with Gift Relief:
The father pays no CGT at the time of the gift.
The son's base cost for the shares is reduced by the deferred gain (£80,000), leaving a revised base cost of £120,000—the same as the father’s original base cost.
This deferral means a higher gain arises when the donee eventually disposes of the asset.
It should be noted that if any cash is involved in the transfer, the cash element is immediately chargeable to CGT.
Qualifying Assets for Gift Relief
Gift Relief is available only on certain business assets, which include:
Shares in an unquoted trading company—any number of shares qualify.
Shares in a quoted trading company—provided it is the donor’s personal company. To qualify as a personal company, the donor must hold at least 5% of the voting rights. This is less common due to the typically dispersed ownership of listed companies.
Assets used in a business, such as land, buildings, goodwill, and plant and machinery, provided the business is operated as a sole trade or partnership.
Agricultural land and buildings used for farming purposes.
Restrictions on Gift Relief
Gift Relief is restricted if the donor’s personal trading company holds non-business assets.
Non-business assets are those not used in the day-to-day operations of the business such as investments. The eligible gain for Gift Relief is calculated as follows:
Gain eligible for Gift Relief = (CBA / CA) × Gain
CBA (Chargeable Business Assets): Assets used for business purposes, generating taxable trading profits.
CA (Chargeable Assets): All assets subject to CGT.
Claiming Gift Relief
To claim Gift Relief, a joint election must be made by the donor and the donee. The donor cannot claim relief unilaterally.
Time Limit: Claims must be made within four years from the end of the tax year in which the gift is made. The claim is included in the donor’s self-assessment tax return for the relevant tax year.
Exception: A joint election is not required when the transfer is to a trust. However, transfers between individuals always require the donee’s consent.
Additional Considerations
Residency Requirement: Gift Relief is only available if the donee is subject to UK CGT meaning they must be UK residents.
Departure from the UK: If the donee leaves the UK within six tax years of the gift the deferred gain becomes chargeable to the donee.
Tax Liability Transfer: If the donee fails to pay the deferred tax within 12 months of the due date HMRC may collect the tax from the donor.
Speak to an Expert
If you are considering gifting assets to your loved ones and are unsure about the tax implications, please contact us. Our team will provide tailored advice to suit your circumstances.
Authored by: London Tax Team
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