The Coronavirus pandemic has produced the biggest change in the daily lives of millions of people seen since the Second World War. There has also been a large amount of economic worry as stock markets have fallen and property prices have been affected by the slowdown in the market. Whilst the priority for most people is quite understandably the health of their friends and family, it is also worthwhile reviewing estate planning as a general exercise as, even in these challenging circumstances, there may be advantages that can be realised if action is taken now.
For many people, the amount of Inheritance Tax that is payable when they die is one of the key drivers behind any estate planning actions that they might take. In particular, clients often want to take advice about making lifetime gifts to reduce the value of their estate when they die. Provided the client survives the gift by at least seven years, the gift usually no longer counts for Inheritance Tax purposes. However, one of the key factors that can often prevent gifts from being made is the question as to whether a Capital Gains Tax (CGT) liability will arise on any such lifetime gift.
CGT is the tax which is paid if you give away an asset (other than cash) and generate a profit (known as a gain) in the process. For the purpose of calculating any such gain, the starting point is to look at the acquisition value of the asset (the value when it was purchased, inherited or otherwise received) and comparing this figure to the value when it is sold or given away. The difference between these two figures will either produce a capital gain or a capital loss and, as markets have performed strongly in recent years, many people own assets which are pregnant with gain and which they do not necessarily wish to give away because of the CGT liability that will follow.
One of the unexpected consequences of the Coronavirus crisis is that as property and stock markets have decreased in value, the gains attributable to those assets will also have decreased as well. In other words it may now be much more attractive to make lifetime gifts of those assets if there is going to be much less CGT to pay when the disposal is made or possibly no tax at all if the asset is given away for no gain or even a loss.
It should also be remembered that everyone has a CGT tax-free allowance which is worth £12,300 in the tax year 2020/2021. If the total gains incurred by any person in the current tax year fall within this limit, there will be no tax to pay. If a person is married or in a civil partnership, he or she can split an asset with their spouse or civil partner with no CGT to pay because spouse exemption will apply. If the asset is then given away to a further beneficiary (perhaps a child or children), there will be two tax-free allowances for CGT purposes available, one for each spouse or civil partner.
For the above reasons, now is an excellent time to review whether lifetime gifts are worth making, especially for assets where there may be reduced or no gains in play when the gift is made. Similarly, if someone owns assets which may increase significantly in value in the future, making a lifetime gift now would be a way of ensuring that the future growth in value falls outside of the person’s estate and therefore escapes Inheritance Tax when they later die.
Lifetime gifts should always be made subject to affordability and to retaining sufficient assets for your own use and needs in the future.
This information sheet is written as a general guide. As any course of action must depend on your individual circumstances, you are strongly recommended to obtain specific professional advice before you proceed. We do not accept any responsibility for action which may be taken as a result of having read this information sheet.
The law is stated as at 6 April 2020
If you require further information, please contact Simon Mitchell on 01892 510000 or by email at: