A popular area in both the ACCA ATX and ACA BPT exams is the IHT and CGT implications of a gift of property during an individual’s lifetime.
A gift to an individual has both IHT and CGT implications. For IHT , it is called a potentially exempt transfer (PET) and there is no tax payable at the time of the gift. There will be a tax liability payable by the donee if the donor dies within 7 years.
For CGT purposes, the gift takes place at market value and the CGT is payable by the donor.
Ron gives a rental property worth £600,000 to his grandson , Harry. Ron bought the property for £100,000 and lives for 7 years after the gift. Ron is a higher-rate taxpayer.
There is no IHT liability.
The CGT liability will be £600,000 -£100,000 =£500,000 gain -£12,300 annual exmeption =£487,700 x 28% = £136,556 payable by Ron immediately.
Harry has a lot of debts so decides to sell the rental property and quit his job. A few years later , he has squandered his inheritance.
Instead of giving the property to Harry directly, Ron could transfer it into a trust which will be managed responsibly for Harry’s benefit.
A gift to a trust has both IHT and CGT implications. For IHT , it is called a chargeable lifetime transfer and is taxed immediately at 20% . If the donor pays the tax , the gift is net of tax and the tax is computed based on 20/80.
Annual exemptions of £3,000 are available each year as well as the nil rate band of £325,000.
Ron gives a rental property worth £600,000 to a trust for his grandson, Harry. Ron bought the property for £100,000 and lives for 7 years after the gift. Ron is a higher-rate taxpayer and decides to pay the IHT.
Ron’s IHT liability will be £600,000 – 2 x £3,000 annual exemptions = £594,000 -£325,000 = £269,000 x 20/80 = £67,250.
As the transfer is a CLT for IHT purposes, Ron’s gain is postponed under gift relief and when the trustees sell the property in the future, they will use Ron’s original cost of £100,000.
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