Keeping it in the family: top tips for advisors on gifting

Transferring assets during one’s lifetime continues to serve as an important tool in managing succession to, and safeguarding, family wealth. For advisors of high-net-worth couples it can look deceptively simple but the UK’s tax rules can materially shift outcomes, depending on a couple’s legal status and who assets are being transferred to.

In this note, we consider key issues in respect of UK Inheritance Tax (IHT), Capital Gains Tax (CGT) and Income Tax (IT). There may be other taxes that are relevant in a given situation and not covered here (both UK and foreign). It is vital that any reorganisation of assets by couples is supported by integrated legal and tax advice in the relevant jurisdictions to avoid unintended consequences.

Legal status and tax treatment

The UK’s tax code affords relatively generous tax treatment to married couples and civil partners where gifting between the parties is concerned:

• Where both spouses or civil partners qualify as Long-Term Residents (LTR), transfers between the two attract full IHT exemption and are treated for CGT purposes on a no gain/no loss basis. This facilitates rebalancing ownership to optimise allowances.
  
  
• The IT rules generally do not distinguish between those that are party to a formal relationship and those that are not: where an asset is transferred from one party to another (regardless of their relationship), any income generated following the transfer will be assessed on the new owner.

When advising on transfers between cohabitees or by married couples and civil partners to others, the tax rules operate differently. Any meaningful planning must begin with a precise assessment of both the couple’s legal position, tax status, and what they hope to achieve by the transfer.

Gifting for IHT purposes

Gifting can be a relatively easy method for married couples and civil partners to transfer assets out of their respective estates:

• Although modest in amount, both the £3,000 annual exemption and the £250 ‘small gift’ allowance, can add value when used correctly and applied consistently across a wider group of beneficiaries.
  
  
• A particularly valuable relief applies to gifts made from genuine ‘surplus income’, on the condition (amongst other things) that the donor’s established standard of living is not compromised.

Specifically for married couples and civil partners, where they are able to meet the relevant criteria, both parties to the relationship may be able to make use of these measures to pass wealth to other members of their family.

Larger gifts may raise starker choices. Outright gifts to individuals - classed as potentially exempt transfers - are generally only disregarded for IHT if the donor survives seven years. By contrast, transfers into discretionary trusts can attract a 20% IHT charge on any excess above the prevailing, (available) nil-rate band. Couples could leverage their respective nil-rate bands to facilitate larger gifts and manage exposure to IHT.

CGT and ownership structuring

While gifting may serve to secure a restructuring of familial holdings or achieve estate planning objectives, it may also trigger unanticipated CGT liabilities. This can be particularly so where married couples or civil partners are looking to transfer wealth to children: unlike those between married couples and civil partners, gifts to children can constitute a ‘disposal’, causing for CGT to become due (subject to any exemptions or reliefs). Married couples and civil partners have more scope to manage their exposure to CGT than others. However, the position will need to be considered carefully to take account of available allowances and reliefs.

Residence and international exposure

When advising on international matters, even when dealing with married couples or civil partners, special care is needed. Key points that need to be borne in mind include:

• The IHT treatment of transfers been married couples and civil partners depends on the situation: transfers from a Long-Term Resident to a non-Long Term Resident only benefit from a limited exemption from IHT. Transfers to other family members who are not UK resident may deplete the transferor’s Nil-Rate Band, and potentially expose the recipient to IHT.
  
  
• Gifts from a UK resident spouse or civil partner to their non-resident counterpart will, generally, not create a CGT liability. Transfers to non-resident family members could give rise to a CGT charge.
  
  
• Transfers of UK income producing assets from a UK resident to a non-UK resident (regardless of their relationship to each other) may make the new owner liable to IT: the terms of any Double Tax Treaty may need to be considered.

Key points for advisers

Transactions that appear straightforward can in practice give rise to unexpected consequences. Distributing family wealth carries an element of tax risk. It is always advisable for any transfer of wealth to be carefully thought through in advance.

For more information, please get in touch with one of our personal tax experts.