As we have previously advised, there is a great deal of speculation concerning the contents of the 3 March 2021 Budget. It is by no means impossible that Chancellor of the Exchequer could introduce a new emergency one-time wealth tax, or take the dramatic step, recommended by the Office of Tax Simplification, of aligning Capital Gains Tax (CGT) with income tax rates in the next Budget.
Whether any changes will go that far is by no means certain, but many tax advisors and lawyers believe that the current main rate of CGT of 20 per cent is as low as it is ever likely to be.
What are the options?
Given this uncertainty, many taxpayers have been reviewing their assets to identify any capital gains and considering their options ahead of the Budget. One opportunity that might be explored is whether assets should be gifted into a trust ahead of the Budget announcement.
A gift into trust is often undertaken when someone wants to make a gift for the benefit of family members whilst retaining control of the assets gifted during their lifetime. For example, it is common for grandparents to make a gift into a trust for their grandchildren. This ensures they can maintain some control over the assets until the grandchildren are of an appropriate age to manage the funds themselves.
CGT rules
Ordinarily, when an asset is gifted, this represents a disposal for CGT purposes. Even though it is a gift, and no consideration is given for it, HMRC typically treats this as a disposal for tax purposes and calculates CGT based on the asset’s market value at the date of the gift. As such, if an asset is gifted prior to the Budget, it will likely crystallise a CGT liability at the current CGT rates.
The reason a gift to trust may be the right strategy is that it allows the donor to potentially hedge their bets. When an asset gifted into trust triggers a CGT liability, an election can be entered into, known as a ‘holdover election’ (under s260 TCGA 1992), that allows for CGT to be deferred until an eventual disposal of the asset when Inheritance Tax (IHT) is due either in theory or practice. This election is often made after the gift and submitted alongside the donor’s tax return disclosing the gift.
A claim for relief under s260 can allow the chargeable gain on the property which would otherwise accrue to the transferor to be held over, with the trustees’ base cost of the property being reduced by the held over gain. Similarly, if the trustees of the discretionary trust decide to transfer the property to one of the beneficiaries a few years later, it may also be possible for the trustees to claim relief under s260 and defer the gain until a later disposal of the property by the beneficiary.
A very helpful feature of gift relief under s 260 is that it does not depend upon IHT actually being paid. For example, the relief is potentially available even if it falls within the individual’s IHT allowance (or ‘nil rate band’) [currently £325,000) or is covered by ‘business property relief’ at the 100% rate for IHT purposes.
Wait and see or act now?
An individual could therefore wait until after the Budget to see whether CGT increases before deciding whether to enter into a holdover election. If CGT does increase, they might prefer for the gift to be taxable at the current CGT rates. Alternatively, if CGT rates are not substantially altered, they could enter into a ‘holdover election’ to defer any CGT liability. A further bonus is that they may have also reduced their assets for the purpose of any wealth tax that might be introduced.
There are some important health warnings to be aware of with making gifts into trust and proper advice should be sought. In particular, there may be inheritance tax costs in establishing the trust. Furthermore, a holdover election is not available if the person making the gift can benefit from the trust. Bearing those potential issues in mind, individuals could have their Christmas cake and eat it this festive season when planning ahead for the Budget.
SRC-Time are one of the South East’s leading accountancy firms in advising on all aspects of business, taxation and corporate finance and we can assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started.
