If you are wondering how to avoid capital gains tax on gifts, you’re in the right place. You might have heard this many times that gifting a property will cut down or eliminate the capital gains tax. But this assumption is not correct with every person to whom you gift. As the gift should be only given to a specified person or organisation to avoid CGT. In this quick post, you’ll learn what is CGT, and how to avoid it. So before discussing how to avoid capital gains tax on gifts, let’s start with when you actually need or needn’t pay capital gains tax.
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Understanding Capital Gains Tax (CGT)
Capital gains tax or CGT is the tax levied on the profit when you sell or dispose of any asset that has increased its value since it was bought. CGT is only payable on the gains you made not on the amount you receive while selling or disposing (or gifting) of any assets. You don’t need to pay CGT on the assets that are non-taxable and if the gains you made are below the tax-free allowance in a year.
When Do You Need to Pay CGT?
Here are the circumstances where you need to pay CGT on the gain when you sell or dispose of:
- a property that is not your main residence or home
- shares that are not in ISA or PEP
- assets of your business
- most personal possessions worth £6,000 or more, apart from your car
- your main home if you’ve rent it, used for business or it’s very large
The assets listed here are all considered chargeable assets.
When You Don’t Need to Pay CGT?
In addition to the gain on the non-taxable assets, you don’t need to pay CGT on gains above any tax-free allowance (£12,300. £6,150 for trusts). Furthermore, when you gift something to your spouse, civil partner or a charity, you are not required to pay this tax. Let’s dig deeper into it.
Find out: CGT rates here!
How to Avoid Capital Gains Tax on Gifts?
Here are some ways to avoid capital gains tax on gifts:
- Use your CGT allowance of £12,300 (2021-22)
- Offset against losses over gains
- Transfer your assets to spouse or civil partner
- Contribute to a pension
- Gives shares to charity
- Use your annual ISA allowance
- Reduce your taxable income
- Spread gains over tax years
- Invest in small companies
Have a query or need more help? Get help from our accountants to find out how to avoid CGT!
CGT on Gifts to Your Spouse
The gifts you made to your spouse or charity are exempted from capital gains tax. It means that you don’t pay Capital Gains Tax on those assets you sold or gifted to your spouse or civil partner, unless:
- you gave them goods for their business to sell on
- you separated or divorced and did not live together at all in that tax year
However, your spouse or civil partner need to pay tax on the gain if they further sell or dispose of the asset. You can work out the gain by subtracting the value of a first owned asset with their value when they’re disposed of or sold. You also need to keep records of the documents as evidence.
Gifts Made to Charity
Assets that are sold or disposed of to the charity are exempted from CGT. If you fall within both conditions, you may be liable to pay if you sell an asset to charity:
- less than market value
- more than you paid for it
Calculate your gain according to the amount you are paid by the charity, rather than the asset’s actual value.
Quick Sum Up
Hopefully, you have got a basic overview of what is CGT, when it is taxed, when you don’t need to pay it and how to avoid capital gains tax on gifts. So, by using the above tips, you can save thousands of pounds. With careful planning and by taking the help of our accountant, you can reduce your CGT effectively without getting into any tax avoidance or evasion.
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Disclaimer: This blog is just written for general information and should not be taken as expert financial advice in any form.