Why now is a good time to consider lifetime tax planning with gifts
Before considering lifetime tax planning with gifts, you need to run through the usual sense-check. Is the gift affordable based on current and future needs (such as care costs in the long term)? What are the tax consequences? Should the gift be made outright or into trust (which will preserve control)? In this article, we examine the the tax consequences.
With the FTSE 100 down by around 20% on the start of the year, and predictions that this trend will continue albeit at a lesser rate, it’s certainly a good time to consider lifetime tax planning with gifts from a tax perspective simply because the taxable values will be, broadly, 20% lower.
While I am dealing with quoted shares, the same would be true of land, property, private company shares and other valuable assets.
Which taxes are relevant?
Inheritance tax ('IHT')
At the modest end of the spectrum, you can make gifts up to £3,000 each tax year, 'the personal allowance', and also use the personal allowance from the previous tax year if unused, without any IHT consequences.
Gifts in excess of the personal allowance(s) may be subject to IHT if you die within seven years of making the gift. However, you can give away as much as you like free from IHT as long as you survive for seven years.
The gift, which should be evidenced in writing, crystallises the value of the transfer. If you die within seven years, IHT will be payable at 40% over the current allowance of £325,000 on the value of the gift at the date it was made and not at the date that you die. The benefit is that the growth in value falls out of your estate for the calculation of IHT.
Capital gains tax ('CGT')
When you make a gift to children you will need to pay tax on any gains made since you bought or acquired the shares where the gain is more than the annual CGT allowance of £12,300. The rate of tax is likely to be 20%.
Again, given the manifest fall in share values now is a very good opportunity to make gifts in a tax efficient way.
Making the most of the opportunity
Gifts between spouses are treated as tax neutral which means that a married couple can reorganise shareholdings between themselves so that the subsequent gift of shares is as tax efficient as possible making use of the joint personal and annual allowances.
Beneficiaries of estates
Lifetime tax planning can be readily achieved by varying an entitlement from an estate where the variation is treated as if made by the deceased. The variation, again, needs to be evidenced in writing within two years of the date of death.
The depreciated value of the stock market presents a further opportunity as IHT is calculated on the value of assets at the date of death. This is because if shares are sold within a year of death at a loss, the difference in IHT payable at the date of death and the IHT payable at the date of sale can be reclaimed from HMRC.
A share portfolio valued at £1m on 1 January 2020 which sells for £800,000 on 1 May 2020 will provide for a claim for the IHT on the difference of £200,000 at 40%, so £80,000.