Capital gains tax on gifts

Overview

When you transfer an asset to someone else, even if it is a gift, you are disposing of it (that is, you no longer own the asset). This means you need to calculate whether you have made a capital gain or loss on that disposal. You do this by deducting the capital gains tax (CGT) ‘base cost’ and any transactional costs from the ‘proceeds’ of the disposal.

Where the disposal is a gift, or in some situations where you sell the asset for less than its ‘market value’, you need to calculate the gain based on the ‘deemed proceeds’. The way you calculate the deemed proceeds might vary depending on who the gift has been made to.

Gift to a spouse or civil partner

As a basic principle, you do not usually pay CGT when you make a gift of an asset to your husband/wife or civil partner. The disposal is said to take place at ‘no gain no loss’. This treatment usually applies as long as both of the following apply:

• you are living together as husband and wife/civil partners (but see below about gifts made following separation)
• the gift is not of ‘trading stock’ (trading goods bought for resale)

In a ‘no gain no loss’ transaction, your ‘proceeds’ are deemed to be such that there is neither a gain nor a loss. This is regardless of the amount actually paid or received in return (if anything). Your deemed proceeds become the base cost of your spouse/civil partner.

‘No gain no loss’ treatment can mean that more CGT may be payable overall. When the asset is eventually sold or disposed outside of the marriage/civil partnership, the entire gain will be assessed in the tax year of disposal and only one CGT annual exempt amount will be available to set against this (assuming the asset is held by only one person when sold).

Comparing this to the position where ‘no gain no loss’ treatment does not apply on a transfer – in this case the capital gain to the point of transfer is taxed, with an annual exempt amount potentially available depending on that person’s other capital gains in the year. Any gain from the point of transfer to the date of sale is then treated as an entirely separate gain, which may benefit from another annual exempt amount in the year of sale.

It is also worth bearing in mind that ‘no gain no loss’ treatment may mean that CGT is avoided entirely. An example where this happens would be if the asset is never sold in the lifetime of the person receiving it. The asset would then form part of that person’s estate for inheritance tax purposes.

A final point to note is that where ‘no gain no loss’ treatment applies, it is automatic – it is not possible to ‘opt out’ in order to make use of the annual exempt amount, capital losses or lower tax rates that might be paid by the disposing spouse or civil partner.

Gifts made during separation or divorce

If you are separated or divorced or your civil partnership has been dissolved, read our page on the CGT consequences of assets being transferred following the breakdown of marriage or civil partnership.

Gifts to other family members

When you make a gift of an asset to a family member or other person you are 'connected' with (as described below) – other than your spouse or civil partner as described above – you need to work out the gain or loss based on the market value at the time of the gift.

This also applies if you dispose of an asset to them in any other way, for example, you sell it to them for less than it is worth – in this case the actual proceeds you receive are irrelevant in calculating the gain or loss.

If you make a capital gain, you may have to pay CGT, though it may be possible to elect to pay this by instalments – see below.

If you make a loss on a gift you make to a connected person you can only deduct the loss from gains you make on gifts or other disposals to the same person. These are known as ‘clogged’ losses.

Connected person

You are connected to your spouse or civil partner (though see above regarding transfers between spouses and civil partners) and they are connected to you. In addition, you are connected to a relative, and they are connected to you, in any of the following cases:

• you are their direct descendant (your parents, grandparents, etc.)
• they are your direct descendant (your children, grandchildren, etc.)
• they are your brother or sister
• they are the spouse or civil partner of any of the above relatives
• they are connected to your spouse or civil partner

The above list includes those who have the same legal relationship to you by adoption – for example, your adopted son, or brother by adoption is connected to you in the same way as a biological son or brother.

It follows that you and your spouse or civil partner are connected to the same set of people. However, if A is connected to B, and B is connected to C, then it does not necessarily follow that A is connected to C. The relationship between A and C must be one of the above listed for A to be connected to C. Therefore, you are not connected to your aunts, uncles, nieces, nephews or cousins.

As an example, if your family tree is as follows then you are not connected to the relatives outside the red outline:

A connected person can also include either of the following:

• certain trustees
• a company you control

Valuation of assets

You must get a valuation of the asset at the time you made the gift and use this value in place of any amount you received for the asset (if anything) to work out your gain or loss. You can agree the valuation with HMRC before you submit your tax return by completing form CG34 available on GOV.UK.

Gifts to anyone else

If you make a gift to someone you are not connected to, such as a friend, or you sell something to them at less than market value, then you can still be treated as making the disposal at market value if the disposal is not at arm’s length.

In most instances, if you gift an asset to someone or you knowingly agree to receive less than market value for the asset by virtue of your personal relationship with that person, the transaction will not be considered as being at arm’s length (or to put it another way, it will not be a normal commercial transaction).

In this case, the actual amount paid (if anything) for the asset will be ignored and the market value will be used instead to calculate any capital gain arising.

The above is different to a commercial transaction at a reduced value. For example, to achieve a quick sale, you might sell a property to a property-buying company which offers you less than the full market value. In such a situation, the proceeds would be the actual amount you receive assuming you have no connection with the property-buying company.

Paying by instalments

If CGT is due on the disposal of certain assets – including land or a controlling holding of shares – by way of gift, then it may be possible to elect to pay the tax by ten equal yearly instalments. We discuss this in more detail at Capital gains tax reporting.

Other considerations

If you gift an asset to someone then you should consider whether there are any inheritance tax consequences. If the gift is not exempt for inheritance tax purposes and you die within seven years of making the gift, it may become chargeable to inheritance tax. See Inheritance tax for more information.

For gifts of property, such as a house, you might need to consider whether a stamp duty land tax charge arises (or land and buildings transaction tax in Scotland, or land transaction tax in Wales). This is payable by the purchaser/person receiving the gift. You should take professional advice.

If you gift business assets or shares in your own trading company, then you may qualify for relief from CGT on the transfer. There is more information on GOV.UK.

Relief is also available in respect of gifts to UK charities and certain other bodies. There is more information on GOV.UK.