Interest on Tax on Gift - Assessment Date Crucial
Although most people know that gifts will normally not be subject to Inheritance Tax if the donor survives for seven years after they are made, it is less well known that there is another tax which can be triggered by a gift: Capital Gains Tax (CGT).
CGT taxes the disposal of assets, not just the sale of assets. So, when an asset is gifted (unless to a spouse or civil partner), CGT may be payable by the donor on any gain in the value of the asset. This is calculated on the difference between the market value when the asset was gifted and the original cost of the asset. An immediate CGT liability can normally be avoided if both the donor and the person in receipt of the gift (the donee) make a ‘gift relief’ election, but this is often not done.
Since such chargeable disposals are often not reported and may not come to light until many years after the donor is no longer around to pay the tax, the relevant legislation allows any CGT which was due on the gift to be assessed on the donee.
In a recent case, the First Tier Tribunal had to consider the position of a woman who had been given three properties by her father. The gifts were made between 2000 and 2003. They were not declared on her father’s tax returns and no CGT was paid by him. He died in 2003.
It was not until 2009, following an enquiry into her late father’s tax affairs, that HM Revenue and Customs raised an assessment on the woman for the CGT due. The assessment was claimed to be for the tax year 2002/3 and interest on the tax was claimed from January 2004 – the date by which she would have been due to pay the tax had the transfers been put on her father’s tax returns but assessed on her. Since the statutory rate of interest on overdue taxes has averaged about 5 per cent since 2004, the interest assessed represented a considerable sum.
The woman argued, successfully, that the interest on the tax should apply only from the due date for the tax year in which the assessment was raised (2009/10).
If you have received a gift of a chargeable asset, there may be tax implications. The most common ‘non-chargeable’ asset for CGT purposes is a person’s principal private residence. Most other assets are chargeable.