Q. I want to gift property to my children during their lifetime but do not want to use a trust. What are the main Capital Gains Tax (CGT) implications from April 2020?
A. A gift is a disposal for Capital Gains Tax (“CGT”) purposes. Furthermore, a gift from an individual to his/her children would constitute a disposal to a connected person (as defined in s.286 TCGA 1992) and so the deemed proceeds are 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 – Sch. 2 FA 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 ten annual installments with the first installment being payable on the normal due date. The legislation can be found at s.281 TCGA 1992 and for gifts, the rules are as follows:
The installment provisions apply to assets that are disposed by way of gift where s.165 TCGA 1992 or s.260 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 (CG50255
- The installments 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 installment 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 installment period otherwise all remaining installments 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 installments the first of which is due on the day the tax would have been payable.
Where the property is disposed of before 6th April 2020, CGT is generally payable under self-assessment and payable on 31st 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 6th 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 installment 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 31st January after the tax year unless a notice was issued late by HMRC).
There are exceptions to the CGT return requirements e.g. no gain/no loss transfers and gains wholly covered by PPR. However, in view of the 30-day compliance deadlines, it will be important that clients are aware they must contact their accountants early in the disposal process if they need assistance.