Many people assume gifting is simply a matter of transferring money to children or grandchildren. However, when larger sums are involved, deciding what to gift can be just as important as deciding when to give. Tax-efficient gifting of assets or cash will enable you to avoid unnecessary tax consequences or complicated financial planning in the future. We look at the different tax and estate impacts of gifting assets vs giving cash.
Why the type of gift really matters
When it comes to gifting, every type of asset is treated differently. Whether you’re gifting cash, property, business assets, shares or investment portfolios, there are different implications for the following:
- Income tax: Cash gifts are usually straightforward, but the income they produce may still be taxable in the recipient’s hands. This could have an impact on your children or grandchildren if they use the cash to generate more money.
- Capital gains tax (CGT): Gifting assets other than cash can create CGT issues, especially where there is a large, unrealised gain. This is usually the main reason to compare cash gifting with asset gifting. In some instances, CGT might apply, but there are exemptions – CGT does not apply to partners or spouses. However, it could apply to gifts given to family members where there’s been a significant gain.
- Inheritance tax (IHT): The 7-year gifting rule needs to be taken into consideration for any cash gifts higher than the £3,000 annual exemption. If you died within 7 years of giving the gift, then IHT may apply. Depending on the date of the gift, there is a taper relief scale ending with the 40% IHT rate.
- Record keeping: Gifts given out of your income or regular gifting patterns will need to be logged with valuation evidence for clear tax records.
Let’s take a more detailed look at cash and different assets to see the tax or estate implications for each one.
Cash vs assets
Cash is usually the simplest and most common type of gift, but it can be less tax efficient. As the donor, it might be more suitable to keep your cash and gift a growth asset like an investment instead.
Although cash gifts themselves are not usually taxable income for the recipient, if there’s any income generated from that cash, this can be taxable. But the timing of the gift matters because this can affect your future estate planning.
Investment shares as gifts could be better than cash
Stocks, shares or investment portfolios can be more tax-efficient than cash, especially if they have built-in gains. Gifting this type of asset could help to preserve the investment value and with estate planning, but it can also trigger capital gains tax (CGT).
The amount of CGT will depend on how the transfer of the investment is structured, and how the stock, share or portfolio has grown. Also, gifting investments can create additional admin, tax reporting, and investment risk.
Property-related gifts require extra caution
Property gifts can be effective for IHT planning, but they are often the most complex types of gifts. Factors such as valuation, potential CGT exposure, and possible ongoing issues can arise if you continue to use or benefit from the property. If you gift your home and stay living in it, this could be considered a ‘gift with reservation’. As a result, this could be added to your estate value when you die, and the 7-year gifting rule may apply.
You can leave your home (or a share in it) to your children (including adopted, foster or stepchildren) or grandchildren and your tax-free IHT threshold increases to £500,000. This only applies if your estate is worth less than £2 million.
Gifting business assets to family members
Gifting business assets can be complex and requires careful financial planning. They can be highly technical and need careful review before a transfer takes place because the tax treatment can differ from other asset classes. It’s important to get professional advice from a qualified financial planner with experience working with business owners.
Making tax-efficient gifts to family involves different strategies
Deciding what to gift and when can be confusing. Your goal might be to lower your estate value to reduce potential IHT or to reduce future CGT exposure. You may wish to support your family now instead of them waiting to receive an inheritance. You might just want to preserve your cash flow to ensure greater financial security for your future retirement.
Each one of these goals points to a very different tax-planning solution. The right gift is not always cash, and the most valuable asset to gift may not be the one with the highest value. A phased plan for gifting might be more suitable than a one-off transfer, particularly where there are annual exemptions. Ultimately, tax-efficient gifting to family members comes from matching the asset to your financial planning objective.
Consider what you can afford to give away permanently, especially if it produces income or is expected to support retirement spending. Get a Lifetime Wealth Forecast to model your financial future.
Talk to our Wealth Managers in Nottingham
As different assets can create very different tax outcomes, gifting is not just about how much to give, but what to give. The most tax-efficient option will depend on your chosen asset and your financial circumstances. You’ll need to consider CGT efficiency, IHT reduction, and ongoing income planning. There might be other tax-efficient ways to gift too, such as ISAs.
If you’re considering gifting assets or cash to family members, get in touch to speak to our financial planning team.
Sources:
https://www.gov.uk/inheritance-tax/gifts
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12920
https://www.gov.uk/capital-gains-tax/gifts
https://www.gov.uk/capital-gains-tax/what-you-pay-it-on
https://www.gov.uk/inheritance-tax/gifts
https://www.litrg.org.uk/savings-property/capital-gains-tax/capital-gains-tax-gifts
https://www.aviva.co.uk/financial-advice/knowledge-centre/gifting-in-the-uk/
https://www.rousepartners.co.uk/gifting-tax-efficiently/
