Sometimes there is a choice of which tax to pay and where a person owns an investment property, they may be able to exercise a degree of choice whether they take a capital gains tax hit, or their beneficiaries pay inheritance tax.

However, there is something of a gamble here – while capital gains tax (CGT) is chargeable at a lower rate than inheritance tax (IHT), if the donor fails to live for at least seven years from the date of the gift, IHT may also be payable.

CGT and gifts

The capital gains tax rules on gifts depend on the relationship between the donor and the recipient. Where an asset is given to a spouse or civil partner, no capital gains tax is payable as the transfer is deemed to be at a value that gives rise to neither a gain nor a loss.

If the gift is to a connected person, such as a child, the transfer is deemed to be at market value (regardless of whether any consideration changes hands). A gift to someone else other than at arms’ length is also deemed to be at market value. This may trigger a capital gains tax liability on the donor.

However, if an asset is left to a person on death, there is no capital gains tax to pay. The property is included in the deceased’s estate at market value. While there may be IHT to pay, there is a tax-free uplift for capital gains tax purposes as the beneficiary’s base cost for CGT is the market value at death.

Gifts and inheritance tax

Lifetime gifts (other than to spouses and civil partners) are potentially exempt transfers for inheritance tax at the time that they are made.

There is no inheritance tax to pay at the time of the gift. However, if the donor does not survive seven years from the date of the gift, the gift is taken into account when working out inheritance tax on death.

Depending on the value of the estate and whether the nil rate band has already been utilised, inheritance tax may be payable, even if capital gains tax was paid by the donor. While taper relief is available where the donor survives at least three years, there is no relief for any capital gains tax paid on the gift.

There is no inheritance tax on gifts to spouses and civil partners, whether made during the donor’s lifetime or on death.

When considering investing in property there are a lot of things that you need to consider and seeking professional advice before taking the leap is extremely important. Fortunately, we are experts in this area so if you want to know more or do you need more detailed advice on any of the above please contact us on 01472 287387.