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The dramatic downturn in the market gives rise to
attractive tax planning opportunities.
Whilst investors despair about falling values, the current
economic storm clouds present an unlikely silver lining to
take advantage of moving round family assets.
Indeed,
there has perhaps never been a better time for those individuals
considering making a gift of an asset to a family member,
as part of a general succession planning exercise. Such gifts
are subject to a potential charge to Capital Gains Tax (‘CGT’)
immediately and Inheritance Tax (‘IHT’) if the
person making the gift dies within seven years of making the
gift. But whilst values are low, opportunities abound.
First, a gift usually triggers a liability to CGT based on
the market value of the gifted asset. That is to say, the
Revenue treats the person making the gift as having received
a cash amount equivalent to the market value of the gifted
asset – put simply, what it is worth on the open market
at the date of the gift
Typically CGT is charged at 18 per cent on gains where assets
are gifted.
Therefore with a substantially diminished current market value
of an asset, a potential CGT charge can either be reduced
or wiped out altogether, depending on the value of the gift
when the person now making the gift acquired it. This is particularly
advantageous if it is intended that the aim is for the asset
to remain in the family for a further generation, for example.
Secondly, a gift represents a ‘potentially exempt transfer’
for IHT purposes; in other words, if the person making the
gift dies more than seven years after the date of the gift,
the gift is not subject to IHT.
Only if the person making the gift dies within seven years
will the value of the gift be ‘clawed back’ into
the estate and charged to IHT as if the gift had never taken
place (albeit potentially on a sliding scale).
The opportunity in the current market is to ‘crystallise’
an asset at a low value, so that if the gift is clawed back,
it is taxed as part of the estate for IHT purposes at the
low value rather than an increased value as may well be the
case at a later date.
These tax planning opportunities not only extend to lifetime
gifts but also to trusts. Unless you are a non-UK domiciliary,
transferring assets into trusts will typically trigger a 20
per cent IHT charge in absence of specific reliefs, as well
as an ongoing decadal IHT charge. This is combined with a
CGT cost of 18 per cent on gains arising on the assets transferred
where gains cannot be held over. So for example, where a share
portfolio is currently standing at a loss, there will be no
capital gain to be taxed.
Furthermore, investors who realise a capital loss in any one
year are generally able to carry this loss forward to use
it in subsequent years. It is therefore vital to seek expert
advice before acting.
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