Chapter: 2 - Inheritance Tax Mitigation: The Basics

Providing for children: Capital Gains Tax

2.10.5

A gift of an asset other than sterling cash may trigger a gain on disposal.  Where a positive tax charge arises, ie to the extent that neither the annual exemption of £10,600 (for 2011/12) or allowable losses are available, it may be possible to hold over the gain – with either a defined business asset or a gift into trust (see 3.7.3).
 
The anti-avoidance rule applying from 2006/07 to 2007/08 inclusive was similar to Income Tax where gains are made by trustees of a settlement under which a minor unmarried child of the settlor can benefit (and child includes a step-child).  In that case the gains are treated as those of the settlor and thus can attract any annual exemption otherwise available.  Any allowable losses or otherwise would attract tax at his marginal rate (TCGA 1992 s77, repealed from 2008/09).  As from 2008/09 the gains of a settlor-interested trust are assessed on the trustees. 

By contrast, if the assets are beneficially owned by the child, though because he is under age they are vested legally in someone else as nominee or bare trustee, the gains arising on disposal are treated as those of the child and thus are capable of attracting his annual exemption and/or (before 2008/09) lower CGT rates of 10% or 20% rather than those of the parent.  As from 2008/09, in 2009/10 and for disposals in 2010/11 before 23 June 2010 there was a single rate of CGT of 18%.  For disposals after 22 June 2010 the rate is 28% to the extent that when added to taxable income the amount of taxable gains exceeds the basic rate Income Tax threshold (of £37,400 in 2010/11 and £35,000 in 2011/12) - and otherwise 18%.  In any event, there remains the advantage of the child’s annual exemption.

The availability of the child’s annual exemption and tax rates for gains deriving from parental gifts to a minor may seem something of an oddity, though it is one of which many have historically taken, and continue to take, advantage.  The disadvantage of course is that come age 18 the child can call for transfer of the assets into his own name absolutely (see 3.4.2(c)).