Twelve days of Christmas: What are the tax implications of all those lovely gifts?

7 December 2023

Estate Planning / IHT, Reducing Tax

Christmas is a time for giving and we’re all familiar with the popular song ‘The Twelve Days of Christmas’ but do we think about the tax implications of the gifts we make or receive?

Perhaps we should, so here is our take on the traditional song.

On the first day of Christmas my true love gave to me

A sports car worth £30,000. (Much more practical than a partridge in a pear tree!)

Should he be worried about the tax on that gift?

Assuming that you’re not married you always need to consider capital gains tax (CGT) and inheritance tax (IHT) when gifting, and sometimes Stamp Duty will be relevant.

Dealing firstly with CGT

Nearly all gifts will be treated as made at market value.

So if the asset being gifted has increased in value there will be a chargeable gain subject to CGT.

The rate of tax is 18% or 28% for residential property and 10% or 20% for most other assets.

The tax is payable even though you have received no proceeds for the disposal of your asset.

Fortunately, private cars are exempt from CGT so no need to worry on this gift.

Turning to IHT

Gifts between individuals are Potentially Exempt Transfers (PETs).

That means no tax is payable when they are made but they may fall back into the estate if you die within 7 years of making the gift.

On the second day of Christmas my true love gave to me

An oil painting.

He bought it five years ago and paid £2,000.

It’s now worth £5,000.

The gift is technically liable to CGT but the painting is a ‘chattel’.

Exemptions

As it is being disposed of for less than £6,000 the gain is exempt and no CGT is payable.

For IHT purposes there are annual exemptions of £3,000 per annum and you can carry them forward one year if you do not use them.

So if no gift was made last year the painting is completely free from IHT, even if the donor dies within 7 years.

On the third day of Christmas my true love gave to me

An antique mirror.

Value Increase

He inherited it ten years ago with a probate value of £1,500 and it is now worth £7,500.

The mirror is also a chattel and there are special rules where the deemed proceeds are between £6,000 and £15,000.

The gain is the lower of the actual gain (£6,000) and 5/3 of the excess of the ‘proceeds’ over £6,000 (£2,500).

So the chargeable gain is £2,500.

Everyone has an annual CGT exemption of £6,000, so if there are no other disposals in the same year this will cover the gain.

The gift is a PET for IHT purposes.

On the fourth day of Christmas my true love gave to me

A Banksy print.

He bought it two years ago for £20,000 and it’s now worth £100,000.

This is also a chattel but because the deemed sale proceeds exceed £15,000 the normal CGT rules apply and the chargeable gain is £80,000.

There is £3,500 of the annual exemption still available but the balance of £76,500 is taxable at 20%.

That is because my true love is a higher rate taxpayer.

If he had unused basic rate band the unused amount is available for that part of the gain to be taxed at 10%, with the rest being taxed at 20%.

The tax bill is £15,300 – ouch!

The gift is also a PET for IHT purposes.

Let’s hope he lives seven years!

On the fifth day of Christmas my true love gave to me

Five gold rings – what else would it be!

They are part of a set so worth more together than separately.

Again they were inherited ten years ago with a probate value of £1,500 each.

Individually the rings are worth £3,000 each but as a set they are worth £20,000.

If you value them individually then as chattels they are each below £6,000, however as a set they only qualify for one £6,000 exemption so there is a chargeable gain of £12,500.

Another £2,500 CGT due!

This is turning into an expensive Christmas for my true love!

At least the gift is a PET for IHT purposes.

On the sixth day of Christmas my true love gave to me

Six geese a-laying.

They lay golden eggs so they’re quite valuable!

Fortunately all animals are wasting chattels for CGT purposes – that means any gain is exempt from tax.

The gift is subject to IHT, but again it is a lifetime gift to an individual so it is a PET and no immediate tax is payable.

On the seventh day of Christmas my true love gave to me

A holiday home in Brighton.

Lucky me!

He bought the property ten years ago for £100,000 and it’s now worth £250,000.

He spent £20,000 on improvements.

That’s a taxable gain of £130,000 and a CGT bill of £36,400.

There’s a £50,000 mortgage on the property.

Once again the gift is a PET for IHT purposes.

SDLT

As there is an outstanding mortgage of more than £40,000 and I already own a home I will need to pay Stamp Duty Land Tax (SDLT) of £1,500 – that sucks!

On the eighth day of Christmas my true love gave to me

Another holiday home, this time in Cornwall.

A Different Method of Gifting

However instead of an outright gift to me this property was put into a discretionary trust for the benefit of me and my descendants.

The figures are the same as for the Brighton property but there is no mortgage.

This time the gain can be held over.

That means no CGT payable now, although the trustees will pay more tax if they sell the property in the future.

For IHT purposes the gift is a chargeable lifetime transfer.

As my true love has formed no other trusts in the last seven years the gift is covered by his £325,000 nil rate band so no immediate IHT is payable.

As long as he survives seven years from the transfer the gift will fall outside his estate and no IHT will be payable.

As there is no mortgage the consideration for the gift is nil so no SDLT to pay.

On the ninth day of Christmas my true love gave to me

Shares in his family trading company.

He has owned a 10% holding for three years and gave me half of that.

Because he owned more than 5% of the company, has held the shares for more than two years and has made no previous business asset disposals the CGT rate is 10% of the market value less the original cost.

Is there a tax bill?

As the shares are worth £20,000 and cost £5 that’s a tax bill of £1,999.50.

Alternatively he can elect to hold-over the gain so that there is no CGT to pay on the gift.

My base cost reduces to £5, rather than £20,000 if no hold-over claim is made.

For IHT the gift is a PET, but even if he dies within seven years it will be covered by business relief provided I still own the shares, so no IHT will be due.

There is no Stamp Duty to pay on the shares as I have not paid any money for them.

On the tenth day of Christmas my true love gave to me

Shares in a property investment company he set up five years ago.

He owned 100% of the share capital and has gifted me 20% worth £80,000.

Capital gains

His base cost for those shares is £20 so there is a capital gain of £79,980.

There is no holdover available for investment company shares so the gain is taxable at 20%, leading to a tax bill of £15,996.

For IHT purposes the gift is a PET which will fall back into his estate if he dies within seven years.

Again there is no Stamp Duty to pay on the shares as I have not paid any money for them.

On the eleventh day of Christmas my true love gave to me

A promise to pay me £100 per month until further notice, as he can easily afford that sum from his excess income.

As it’s a gift of cash there is no CGT to pay.

From an IHT perspective regular gifts from income are exempt and fall immediately outside the estate – so no seven-year waiting period for full exemption.

On the twelfth day of Christmas my true love gave to me

A half share in his home – he did save the best till last!

He bought the house four years ago for £400,000 and it’s now worth £600,000.

There is no CGT to pay as he has always occupied the house as his main residence.

However for IHT purposes the gift will be treated as a gift with reservation of benefit because we are unmarried and I do not live in the property.

That means it will remain in his estate on death regardless of how long he survives.

There is no mortgage so no SDLT is due.

Final Word

I hope you’ve enjoyed our light-hearted look at gifts.

The serious message is you should always consider the tax angles when contemplating making gifts – otherwise you may end up with an unexpected and unwanted tax bill.