UK: Is A Gift Ever Just A Gift?

Last Updated: 15 May 2014
Article by Aimee Dooley

I'm reminded of a news story which hit the headlines in 2010 when considering gifting in terms of Inheritance Tax. This story concerned a couple in Dorset who had been using a vase as an umbrella stand for over 50 years and upon inspection by an antiques dealer confirmed that the vase was in fact an 18th century Chinese vase valued at £500,000; more than the couple's house was worth. This couple saw a huge increase in the value of their estate overnight. This scenario highlights issues to people who have assets which are of a substantial value other than just their main home and wish to ensure they are not stung by 40% Inheritance Tax on their estate after their death.

Suppose the couple realised how much this vase was worth and in turn gifted the vase to their daughter, having promptly packed it off in plenty of bubble wrap and polystyrene popcorn and duly delivered to their daughter's home, in an attempt to decrease the value of their estate for Inheritance Tax purposes. This would appear to be a simple gift would it not? This would in fact be a deemed disposal of the vase for Capital Gains Tax purposes and a Potential Exempt Transfer for Inheritance Tax purposes. This is something the taxman would want to hear about and where the taxman is involved there could be costly penalties.

The couple should be made aware that a Capital Gains Tax assessment is required whenever a gift is made of an asset worth more than £6,000 (this generally excludes gifts of personal cars and main residences). It is important to seek advice in relation to gift giving of assets as there are unknown potentially costly consequences. It is important to remember that a valuation of the asset should be obtained at the time of acquisition and disposal. With a personal allowance of £10,900 for 2014-15 a disposal of an asset will not incur a liability for many people, however for those that do incur a liability the tax is calculated at either 18% of the gain or 28% of the gain depending on your taxable income.

The couple should be made aware that the gift is a Potentially Exempt Transfer in terms of Inheritance tax. This means that as long as the donor, the gift giver, survives for a period of 7 years after the date of the gift, the asset is deemed to be completely removed from the donor's estate. It will not be included within an Inheritance Tax account on death. If the donor dies within the 7 years from the date of the disposal the gift will be subject to tax. Depending on the value of the gift and the overall value of the estate of the deceased there could be tax for the recipient to pay! It is therefore important that when you are making a disposal, check with your solicitor, they are able to advise you on the implications of the gift and prepare a deed of gift to evidence the date of the gift and valuation for good record keeping in case HMRC do decide to investigate your affairs.

Had the couple realised how much the vase was worth and thought they could outsmart the taxman by gifting the vase to their daughter but continue to use and now proudly display the expensive vase in their hallway as opposed to continuing to use it as an umbrella stand, they would be wrong. Whilst there still may be a Capital Gains Tax liability and the gift is a Potentially Exempt Transfer, there is also a Gift With a Reservation of Benefit. This is an anti-avoidance measures introduced by HMRC several years ago to clamp down on gifts of assets as a means of reducing estates for Inheritance Tax purposes. In this case, it means that whilst the couple had purported to gift the asset to their daughter, they had in fact retained the asset for their sole enjoyment. As the couple have not really given away the vase it remains part of their estate for Inheritance Tax purposes. Only when they actually dispose of the vase to their daughter's home will the 7 years run in respect of removing it from their estate. They failed to meet their objective of reducing the value of their estate by continuing to enjoy the asset.

I am inundated with requests for the transfer of a client's main home to their child, however as the client proposes to continue to live at the property without paying market value rent to their children, the gift of the home in these circumstances is a Gift With Reservation of Benefit and does not achieve anything other than to open the asset up for children to deal with as they please, this includes the asset being considered part of the child's estate for insolvency proceedings, divorce proceedings and Inheritance Tax purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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