Keeping it in the family-a generational opportunity for estate owners

Amidst the current economic crisis, is there an opportunity for estate owners to consider wider family planning and passing wealth down the generations in a tax-efficient way?

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Julia Rosenbloom
Published: 28 May 2020 Updated: 13 Apr 2023

Amidst the current economic crisis, is there an opportunity for estate owners to consider wider family planning and passing wealth down the generations in a tax-efficient way?

The Covid-19 climate

Many landed estate owners will have a wide asset base including land and buildings, cash, savings and investments and generate revenue from several income streams such as farming, property letting and their investment portfolios.

In these unprecedented times the farming industry has seen a real boom where the demand for retail produce has increased since the introduction of lockdown on March 23rd. As a result, the average price of bare agricultural land has not really moved and the key driver here will undoubtedly focus on Brexit and what trade deal is struck with the EU.

However, estate owners with investment portfolios will have undoubtedly been hit by the recent movements in the markets. At the time of writing (21 May 2020) the FTSE 100 market is down approximately 20% since the start of 2020, although a rally since lockdown was first introduced on March 23rd means that it has rebounded c.20% off March lows.

The UK market has been particularly volatile, in part due to the high weighting of oil and gas companies which have suffered as a result of the weak oil price (this in comparison to the US’s S&P 500 index which is only 8% down on the year to date benefitting from its high weighting in tech companies such as Microsoft and Alphabet which have more robust business models for the current environment). Markets are likely to remain volatile until the full economic impact of Covid-19 and global lockdowns become clearer.

However, while share values are suppressed some estate owners may wish to consider tax efficient gifts of these assets to future generations and keeping assets within the family structure. It should be noted that asset selection is a very important aspect of any gifting decision and discussion should be had with your tax and investment advisers.

Family planning - lifetime gifting of assets

Where an individual gifts an asset, such as a share portfolio, to another individual (e.g parent to child) two capital taxes need to be considered – Inheritance Tax (IHT) and Capital Gains Tax (CGT).

For IHT purposes a gift of shares between two individuals during their lifetime is a Potentially Exempt Transfer (PET) and the market value of the shares gifted will only be subject to IHT in the event that the donor dies within seven years of making the gift. For CGT purposes the gift between family members is likely to be made between ‘connected persons’ and so CGT is charged on the gain to the donor. The gain here being based on the difference between the market value of the shares and the donor’s base cost.

So what are the benefits of gifting away assets now to the family?

Firstly, it will give the individual the ability to pass on assets at a lower value and pay any potential CGT on a smaller gain (or possibly no gain at all). Secondly, if the donor does not survive seven years, and the asset passes back into their estate for IHT purposes, it will be valued at the point it was given away i.e. a potentially suppressed value.

By way of an example - a share portfolio was originally acquired at £50,000, but worth £100,000 before the recent market falls. If the person had gifted that portfolio to their child at its peak valuation, they would have to pay CGT on the £50,000 gain (ignoring annual exemption and losses). Assuming that the shares are now worth £75,000 after recent market falls, this means the individual will only have to pay CGT on a £25,000 gain. This could be an opportunity for families with a long-term view and who believe the shares are likely to bounce back after the impact of coronavirus subsides.

What other matters should be considered when gifting within the family?

Many family structures will include children aged under 18 and the prospect of potentially gifting valuable assets to them may not be to everyone’s tastes. The possibility of using structures such as trusts can still work in the same way and lifetime IHT rates are currently at the same rate as the main rate of CGT. Trusts can be used to pass assets to the next generation without paying CGT, if structured correctly.

The comfort provided to the donor that the child cannot squander the money may also make trusts attractive to some. However, it should be noted that there will be other tax impacts and pitfalls to consider where assets are gifted to a child who is under 18 (even within a trust structure).

If you would like to discuss these possibilities further, please do get in touch.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Ref: NTAJ14052068


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.