Unlike a cash gift, on which there is no liability to CGT, if you make a gift of an asset or an investment, the transfer is a deemed disposal for the donor. The donor is taxed as if they had sold the asset/investment at full market value, which in some cases could result in a significant liability. While CGT is typically at a lower rate that IHT, it can nonetheless pose a problem. The donor may be asset rich, but cash poor and unable to settle the CGT liability.
With tremendous uncertainties currently affecting every corner of our lives, it is not surprising that market values have fallen significantly at the moment – the equity markets have fallen more sharply than anything recorded in peace time. However, this does provide an opportunity to shift wealth down to the next generation at a lower tax cost. With a lower market value, the gain on assets will be lower as will be the CGT liability.
If the asset value recovers, the goal of moving the value for IHT purposes has succeeded, with a lower CGT impact. This does need to be considered against the possibility that the value could fall further still and possibly not recover, in which case the CGT burden exists but without the benefits. As we are not blessed with crystal balls, the prudent approach would be to take advice from your tax advisor or estate planner, working alongside your broker or financial advisor, to ensure that appropriate assets are identified.
The possibilities for this sort of planning are not restricted to equity markets – any asset may have seen a fall in value - but there may, of course, be difficulties with establishing market values for some assets; professional advice on valuations should be obtained.
If you would like to discuss the points raised above in relation to your personal affairs, please contact us.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2020.