Four ways to avoid or defer your CGT bill
The big tax planning picture
Tax planning can be really tricky. Just when you think you’re getting somewhere up pops an obscure rule which turns hours of research into a complete waste of effort. One area where this is particularly true is estate planning. The tax system is designed to stop you shifting assets simply to avoid tax. Where your aim is to dodge IHT on death by giving away your wealth during your lifetime, you can end up paying CGT instead.
Tax on gifts
If you give away an asset or sell it for an amount intentionally less than its real value, the Taxman will charge CGT on the basis that you received the full amount the asset would have fetched had you sold it on the open market.
Tip. Some assets are exempt from CGT, such as cash (but not foreign currency) and government stocks, e.g. Treasury Stock. So if you’re aiming to reduce your estate by giving away assets, consider these first. But this isn’t the only way to avoid CGT.
Deferral - gift of a business
If you started your business from scratch or bought it for an amount that’s less than it’s worth now and you give a share of it away, this could trigger a CGT bill. But the good news is that this can be “held over” (postponed from a tax charge) until the recipient of the gift sells the asset. For example, if you gave your daughter shares in your company and you both signed an election, there would be no CGT bill until she sold the shares, or gave them away, say, to her children (see The next step). And, assuming there’s no change in the CGT rules by then, the gain could be held over again. This means that CGT can be dodged indefinitely by shunting it forward from generation to generation.
Deferral - non-business assets
A gift of an asset via a trust can trigger a CGT bill in the same way as a direct gift. For example, if you transferred some quoted shares into a trust for your children, CGT will be calculated as if you had sold the shares. But by using a different election from that used for business assets, you can defer the CGT until the assets are sold or they pass out of the trust to the ultimate beneficiary (see The next step).
Deferral - by instalments
The final, and by far the least well known CGT deferral trick, is rather different to the two already mentioned. Where you make a gift of land or property, unquoted shares, or quoted shares that give the recipient control of the company to which the shares relate, you can pay any resulting CGT over a ten-year period. However, like the other deferral methods, you’ll have to make an election to take advantage of this rule (see The next step). A neat IHT planning advantage to this method is that the full amount of tax payable, although spread over ten years, counts as an immediate reduction in your estate for IHT purposes as soon as you make the gift.
For a free draft business gift election (TX 11.19.04A), a free draft gift into trust election (TX 11.19.04B) and CGT instalment election (TX 11.19.04C), visit http://tax.indicator.co.uk.