Is now the time to make gifts?
With the financial hangover of coronavirus looming, many people are looking at providing financial support to their own extended family members
‘The Telegraph’ this week quoted Paul Johnson, the director of the Institute for Fiscal Studies (IFS), in a wide-ranging article stating that taxes will need to rise. Several commentators have pointed to the fact that Rishi Sunak, the Chancellor of the Exchequer, needs to raise over £44 billion in taxes and many now fear that Capital Gains Tax (‘CGT’) will be one of the first affected.
What might the Budget hold?
We have already seen this Government, and in particular this Chancellor, curtail Entrepreneurs Relief. Now, with the financial hangover of the coronavirus pandemic looming, many people are looking at providing financial support to their own extended family members before any CGT rises come into force.
Lifetime gifts and tax planning
Of course, making a gift and surviving for seven years has always been an option for those looking to mitigate Inheritance Tax (‘IHT’) on death. The crisis though has focused minds and given some the time to contemplate estate planning matters and, as a result, more clients are looking to shift wealth down a generation or two to those who need it.
A deterrent to gift in the past has been the CGT which can arise. A gift is treated as a disposal for CGT purposes so if you give, say, shares to your child and the value is higher than the original acquisition cost, you pay CGT on the difference at 20%. That is a tax charge arising when there are no cash proceeds available.
A lot of values have been affected by the global economic slowdown. Shares and property values may have reduced to such an extent that gains are temporarily low, wiping out potential CGT charges on such gifts, or at least reducing them to palatable proportions.
Making a gift
This reduction in value may have happened just at a time when the likely recipients of gifts are struggling financially to make ends meet. Children with young children of their own may be experiencing job insecurity or losses and/or falling income.
The tax opportunity for parents to make a gift may well align with the financial need of children receiving it. There is the additional concern that tax rules may soon be tightened with rates possibly increased and restrictions on reliefs broadened as the Government needs funds to finance the spiralling national debt.
Guarding against relationship breakdown
As well as CGT, another factor which sometimes holds back a parent from making a gift is the concern that the child may run into matrimonial problems in the future. Seeing the benefit of a generous financial provision being shared with a hostile ex-spouse is not something any parent would relish but there are options to mitigate this risk: -
- The “gift” could just be a loan. This could be interest-free or at a low level. There would be no IHT saving involved as the parent would still retain the value of the money lent until the loan is written off but it does provide a child with access to funds at a time when he or she may need them. If a loan is proposed, it should be properly documented.
- If IHT planning is a key consideration, the loan could be routed through a trust so that the parents give the money to the trustees (which could be the parents themselves) and the trust would lend to the child. If the money has to be repaid, the sum goes back to the trust and is still outside the estate of the parents. Often such a trust would be discretionary so that the children have no entitlement to any part of the trust fund and this can provide matrimonial protection. This combination of trust and loan is a common way for parents to help a child and his or her partner on to the property ladder but it’s not “bulletproof” from a claim on divorce. The couple also entering into a cohabitation agreement or prenuptial agreement would provide additional protection.
- Gifts could be made to help grandchildren instead of giving money direct to children. This could be done by setting up a trust or pension for a grandchild or by paying school or university fees. This indirectly benefits children (the grandchildren’s parents) as it alleviates a need for those parents to provide such financial support.
With a Budget just around the corner and a Government dealing with debt approaching 100% of GDP, anyone contemplating gifts as a means of protecting family wealth should be looking to take independent advice now.