Have you been thinking about inheritance tax (IHT) lately? It’s surprising how often it rears its head. But, there are a couple of main anti-avoidance rules to be mindful of whenever considering IHT planning. As such, we want to take a brief look at ‘gift with reservations of benefit.’

Gift with Reservation of Benefit

• During lifetime, individuals may choose to gift assets out of their estate to other individuals, trusts or even companies to reduce the taxable value of their estate for Inheritance Tax purposes.

• Typically, a gift to an individual would be a Potentially Exempt Transfer (PET), whereby the gift remains in the donor’s estate, but will become exempt from Inheritance Tax once the donor survives for 7 years following the date of gifting.

• There are anti-avoidance rules designed to cover instances where individuals may gift assets to other individuals, but may retain the asset for their own personal use.

What is a Gift with Reservation of Benefit?

• It is where an individual gives away an asset but continues to be able to benefit from that.

• The most common example is where the donor gifts their house to a donee (i.e. their child), but continues to live in the property.

IHT implications of a GWROB:

• Where an individual makes such a gift, the effect of the anti-avoidance rules is to treat the asset as still forming part of the donor’s estate at the date of death.

• So for instance, if the donor continues to live in a donated property until the date of their death, the house is still treated as being in the donor’s death estate and will remain fully chargeable to Inheritance Tax.

Some exceptions are permitted, such as where:

• The donor pays the donee a full market rent for use of the property that they have donated;

• The donor is virtually excluded from benefiting from use of the asset (for example, they only visit or stay in the property periodically), or;

• The donor stays with the donee in a donated property for domestic purposes, such as to receive medical care from the donee.

Pre-Owned Assets

Some individuals have attempted to avoid the Gift With Reservation of Benefit rules by making a cash gift instead.

They may do this by selling an asset, such as a house, but then gifting cash proceeds to another, who may then purchase an asset that the donor subsequently uses.

The most common scenario is where a donor sells a house, gives the cash proceeds to the donee, who then buys a new house that the donor subsequently lives in with the donee.

The Pre-Owned Assets rules impose an income tax charge on benefits received by the former owner of the property.

An income tax charge is only imposed in situations where:

1. the former owner benefits directly or indirectly from an asset they previously
   owned; and
2. the transfer is not within the Gift with Reservation of Benefit rules.

How the income tax charge is calculated depends on the type of asset.

Where the Pre-Owned Assets rules apply, the income calculated must be declared on a Self-Assessment Tax Return by the donor.

An exception is where the total Pre-Owned Assets tax charges in a year do not exceed £5,000.

A donor may elect to not be subject to the Pre-Owned Assets tax charge. However, the drawback is that the original transfer made by the donor will be treated as a Gift With Reservation of Benefit, meaning that the original transfer falls back into the donor’s estate and could be subject to Inheritance Tax.

Struggling with Tax?

As with all areas of Tax, complexities do arise. It can be difficult to understand the jargon and to know whether you are compliant. As such, it is always best to seek professional advice if you are at all unsure. We can help you there! With a team of seasoned Tax specialists, we can talk you through the complexities. So, please do take us up on one of our free introductory meetings. There, we can talk through your concerns and help you understand what we do and how we do it. There really is no need to struggle – with us by your side we will be partnering in your success in no time!

As experts in Tax, it is important for us to keep people abreast of changes in legislation. It’s also important to remind people of useful information at the appropriate times. As such, we would like to bring child benefits back to the forefront of people’s minds!

Here’s what you need to know…

2024 Changes to Child Benefit

In the 2024 Budget, the government increased the amount you can earn before you start to lose child benefit.

Previously, it was taken away entirely when one parent earned more than £60,000. This has been increased to £80,000.

It won’t start to be reduced until one parent earns more than £60,000 – up from £50,000.

Therefore, it is now time to opt in to receive child benefit if your income is under the £60,000 limit to receive full child benefit payments.

Be aware…

New Child Benefit claims made on or after 6 April 2024 and before 8 July 2024 will result in payments being backdated but will be subject to the charge in the 2024 to 2025 tax year, if your income exceeds the new threshold of £60,000.

Child Benefit is automatically backdated for 3 months, or to the date of birth of the child if later.

Get in touch!

As ever, if you need any help or further clarification, please do not hesitate to get in touch. As reputable tax professionals, we are always happy to see how we can help. Plus, we offer a free introductory meeting before you commit to our services – so you can see what we do and how we do it with no obligation!

If you’d like to speak to one of our experts, please do get in touch. For our Chichester office, please call 01243 782 423; Whiteley 01489 287 782; or Midhurst 01730 817 243. Alternatively, you can email us from our contact page and we will be in touch!

We also update our YouTube Channel regularly with new content, see here: Lewis Brownlee YouTube channel.

What to keep in mind…

The reduction in the annual exempt amount could have a substantial impact on both your short-term and long-term financial strategies. As the fiscal landscape adjusts, understanding the implications of these changes is more important than ever. It’s essential to evaluate how these lowered allowances might influence your decisions when it comes to selling assets such as property, shares, or other investments.

How we can help…

If you’d like to speak to one of our experts about CGT, please call 01243 782 423, or email from our contact page and we will be in touch!

We also update our YouTube Channel regularly with new content, see here: Lewis Brownlee YouTube channel.

Capital gains tax (CGT) is a levy imposed on the profit made from the sale of assets. Whether you’re selling shares, property, or other investments, it’s crucial to understand how CGT works to ensure compliance.

How CGT works…

In the UK, individuals are subject to capital gains tax on the disposal of assets that have increased in value since they were acquired. The rate of CGT depends on various factors such as the individual’s income tax bracket and the type of asset being sold.

CGT Tax Rates for 2023/24

For the tax year 2023/24, the current capital gains tax rates for individuals are as follows:

• Basic rate taxpayers: 10%
• Higher rate and additional rate taxpayers: 20%

However, gains on the sale of residential property that are not eligible for private residence relief are taxed at 18% for basic rate taxpayers. But, they are taxed 28% for higher and additional rate taxpayers.

Annual Exempt Amounts

It’s important to note that each individual has an annual tax-free allowance. This is known as the Annual Exempt Amount. For the tax year 2023/24, this amount stands at £6,000. Pleae note that it was reduced from £12,300 from 6 April 2023. It is also due to be reduced further to £3,000 from 6 April 2024. Total gains up to the Annual Exempt Amount are not subject to capital gains tax.

Are there any Reliefs?

There are various reliefs and exemptions available that can help minimise CGT liabilities. These include:

• Annual Exemption: As mentioned earlier, individuals can utilise the annual tax-free allowance to offset gains below the threshold.
• Principal Private Residence Relief: Provides relief from CGT on the sale of a property used as your main residence.
• Business Asset Disposal Relief: This relief applies to qualifying business assets and reduces the rate of CGT to 10% on gains up to a lifetime limit of £1 million.
• Gift Holdover Relief: Allows individuals to defer CGT when assets are gifted, rather than sold, under certain conditions.
• ISA and Pension Accounts: Investments held within Individual Savings Accounts (ISAs) and Pensions are typically exempt from CGT.

It’s essential for individuals to keep detailed records of their asset acquisitions. The same is similarly true of their disposals. Only then can they accurately calculate their CGT liabilities. Seeking professional advice from a tax adviser can also be beneficial in understanding complex tax rules and optimising tax planning strategies.

In Conclusion…

Capital Gains Tax is an important aspect of the UK tax system. So, individuals should be aware of it when buying, selling, or gifting assets. The reduction of the Annual Exempt Amount in recent years will likely result in more individuals being required to pay a Capital Gains Tax. Please do get in touch if you’d like our assistance with any CGT related matters.

If you’d like to speak to one of our experts about, please call 01243 782 423, or email from our contact page and we will be in touch!

We also update our YouTube Channel regularly with new content, see here: Lewis Brownlee YouTube channel.