People will be fairly familiar with the seven-year rule for Inheritance Tax (IHT), where the donor must survive seven years from the date of gift for it to be IHT free. Less familiar are the Capital Gains Tax (CGT) rules on gifting. Where an asset is gifted, the donor is taxed on the market value of the asset at the date of the gift, even though no actual proceeds are received. In certain circumstances, holdover relief may be available to defer the capital gain, but this only applies to qualifying business assets, such as:
- Agricultural land and buildings used for the purposes of farming
- Shares in an unquoted trading company
- Assets used in a trading business
Even some of the above will not qualify for full holdover relief, such as shares in a farming company which also has rental or investment assets. This is where the use of trusts comes in. A trust is a separate entity. When assets are placed into a trust, the legal owners, known as the trustees, will hold assets on trust for the ultimate beneficiaries.
Tax Consequences of gifting assets into trust
The most common types of trust are ‘discretionary’ trusts and ‘interest in possession’ trusts. A gift to either of these is a chargeable lifetime transfer on which IHT is immediately payable.
Business property relief (BPR) and agricultural property relief (APR) should be available to reduce the value of any chargeable lifetime transfer of relevant business or agricultural property, so the gift of land, or shares in a farming company to a trust should be IHT free.
BPR and APR are not, however, available on the gift of a let cottage in isolation, or on other non-business assets. In these cases, IHT would be payable on the value of the gift over and above the donor’s IHT nil rate band.
A gift into trust is a disposal for CGT purposes, however, the gift can be made without any immediate CGT being payable if holdover relief is available. This may sound familiar, but the use of holdover relief is a lot more wide ranging with regard to trusts. Providing the gift is a chargeable lifetime transfer for IHT purposes, then the gain on any asset can be held over, not just on qualifying ones. There are, however, restrictions where the trust is settlor interested. A settlor interested trust is one where either the settlor (the person introducing assets into a trust), their spouse, or their minor dependent children may benefit.
Taking the above into consideration, it is possible to gift a let cottage, or shares in a farming company with non-trading assets, to a trust without an immediate IHT charge and also holdover the capital gain so that no immediate tax liability arises on the transaction. If after a few years the trustees decided to break the trust and appoint the assets to the beneficiaries then provided the qualifying conditions are still met, this could be done without an immediate IHT charge and again holdover the capital gain.
Other benefits of gifting assets into trust
Apart from the potential tax advantages, there are a variety of other reasons why a settlor may wish to transfer assets into trust, such as:
- Guaranteeing succession of property – by gifting assets to a trust, the settlor can make sure that the assets they are giving away remain within their family.
- Flexibility – if, for example, the potential beneficiaries are under 18, it can be difficult to know if they will want to take on the farm. Putting the farm into a trust means it is protected until a successor becomes apparent.
- Protecting a vulnerable beneficiary – to avoid an individual holding significant assets being targeted by someone wishing to take advantage of them.
The consequences of making any gift will always depend on the circumstances at the time. It is important to take comprehensive advice at an early stage when considering succession planning and Ensors are here to help.
