17 December 2024

Asset gifting: How to do it right

Services:

Personal Tax Planning,

Wealth planning & Private client

The most recent UK budget has put inheritance tax back at the top of many business owners' financial planning agendas – particularly in the business and agricultural sector – and recent changes to UK inheritance tax rules mean that traditional strategies may need rethinking. One of the most common (and easiest) ways to mitigate the impact of duties upon death is pass on assets during your lifetime.  Or is it?

Here,  Director at Haines Watts Tax Advisory Nici Goldsmith explains why gifting can still make a difference for preserving your assets, outlines the impact of the latest IHT rules, and highlights strategies for gifting assets effectively.

 

The rationale behind asset gifting

The most common reason for gifting assets during your lifetime is to reduce the size of your taxable estate, slimming your overall obligations and pressure on your family. For owner-managers, however, there’s also a more personal dimension – as a way to secure your family’s financial future, manage succession in a business, or support loved ones in buying property, funding education, or starting their own ventures.

The right estate planning should provide peace of mind in the future of your business and your family. By acting early, you can avoid leaving your family with the burden of large tax bills or the need to sell valuable assets to pay them. But gifting must be carefully timed and structured to ensure it aligns with your financial needs and long-term goals.  After all, you don’t want to compromise your own standard of living, and what if you need money for care later in life?

 

Changes to IHT rules in the latest budget

The latest UK Budget introduced significant changes to inheritance tax reliefs, particularly for business and agricultural properties. For many owner-managers, these changes have reduced the scope of previously generous reliefs:

1. Business Property Relief (BPR) and Agricultural Property Relief (APR):

  • These reliefs were previously unlimited, providing 100% tax-free transfers for qualifying assets.
  • Now, the total relief is capped at £1 million. Above this threshold, a 20% tax rate applies.
  • Assets like unlisted trading shares, Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) shares, and many AIM-listed shares no longer qualify for full relief. This creates a need to reassess whether holding these assets still offers tax advantages.

2. Nil-Rate Band Freeze

  • The nil-rate band has been frozen at £325,000 since 2009 and will remain so until 2030. Had it risen with inflation, it would now be around £500,000, highlighting the increasing burden of IHT on estates.

3. Pension Funds and IHT Exposure

  • From April 2027, pension funds will be included in taxable estates for IHT purposes. This change could make pensions, once a tax-efficient legacy tool, subject to substantial combined taxes.

For some agricultural and business owners, the reduction in relief limits may mean that their heirs may need to sell assets to meet tax liabilities. Borrowing to pay inheritance tax has been a feasible alternative in the past (particularly when interest rates were lower), but was not necessary when inheriting business or agricultural assets.  Now this will become a stark choice for heirs – sell or borrow?

 

How to gift assets strategically

The concept of asset gifting covers multiple processes, from straightforward gifts to complex structures. Most business owners will need to consider a combination of these in order manage any estate of a certain size.

1. Outright Gifts

Gifting assets outright is the simplest approach but comes with considerations:

  • Potentially Exempt Transfers (PETs): Gifts are exempt from IHT if you survive seven years after making them. If you die within the first three years, the entire value of the gift is brought into account. Between years 3-7, any tax liability tapers down.
  • Capital Gains Tax (CGT): While gifts to a spouse are usually exempt from CGT, gifting to children or others triggers CGT on any gain in the asset’s value.

If you’re gifting a young business or an asset with limited current value, the tax impact may be lower – which is why it’s so important to consider these considerations early. For established businesses or assets with significant value, consider additional planning tools like trusts or Family Investment Companies.

2. Using trusts

Trusts can help you transfer assets while retaining control, as you can remain involved as a trustee, and set the terms of the trust according to your wishes. Key options include:

  • Discretionary or life interest Trusts: These allow flexibility over who benefits and when, but gifts above the £325,000 threshold are subject to a 20% IHT charge on transfer, although this can be extended by business relief and agricultural property relief, but only up to £1.35 million in total, and you need to consider taxes on every tenth anniversary and on capital distributions, as well as how any income and gains within the trust will be taxed.
  • Discounted Gift Trusts: Ideal for passing on capital while retaining income. These involve placing cash into a trust to buy a life assurance bond. You give away future rights to the bond but retain the right to draw down 5% of the original capital as income for up to 20 years. After seven years, the remaining value exits your estate for IHT purposes.

3. Family Investment Companies (FICs)

An increasingly popular option, FICs combine aspects of trusts and limited companies, offering flexibility and control, particularly where there is a family business:

  • Growth Shares: You can gift growth shares (which gain value over time) to beneficiaries. Often the  initial value of these is low for IHT purposes.  You can retain capital and dividend rights for yourself, and the articles of the company and any shareholder’s agreement can ensure that the gift cannot be abused, and what happens to the shares in the event of death, divorce, if the individual wants to exit the company etc..
  • Loan Notes: Sell assets to the FIC in exchange for a loan note, allowing you to draw cash tax-efficiently.

FICs can be particularly useful if you want to reduce your taxable estate while maintaining income and control over how the assets are managed.  Other tax considerations, such as capital gains tax, need to be taken into account, however, so it is always wise to take advice from a suitably qualified and experienced tax adviser.

4. Alphabet shares

By restructuring ownership through alphabet shares, you can control how dividends are distributed without changing voting rights. This can be useful for parents who want to retain a controlling interest in a business, or who wish to protect assets from potential issues such as divorce or family disputes.

For example, a founder might hold A shares with voting rights and retain B shares for dividend flexibility, while gifting C shares to family members who can draw a certain income, without necessarily having a voice in the business.  There are other issues with these – for example, gifting to a minor child by the parents does have some anti-avoidance rules in respect of income generated, but there are also some little known inheritance tax exemptions that can be used.

 

How to choose the right strategy for you and your business

The amount, speed and timing of asset divestment can be a complex undertaking – one that increases with the scope of your assets and the diverse circumstances of your family. Owners need to consider the following questions:

  1. What do you need to live on: Before gifting, ensure you’ll have sufficient income for living expenses, including potential care costs in later life.
  2. What protections do you need to put in place: If gifting to children, consider the risk of assets being divided in a future divorce, or dispute among siblings. Trusts can help protect assets in these situations, though they also cost more to set up and administer.
  3. How much control do you need: Many business owners worry about losing a say in what happens to their companies. Tools like FICs or alphabet shares can address this concern, allowing you to retain control while gradually transferring value and also teaching the next generation (or generations) about the business, or investing (or both).
  4. What kind of assets are involved: Gifting income-producing assets, such as rental properties or shares, may impact your income. Strategies like discounted gift trusts can allow you to retain income rights while transferring ownership where cash in involved.

The earlier you plan, the better. For new business owners, gifting shares when the company has little value can minimise tax implications and maximise family tax benefits. If your business is more established, start thinking about succession and exit strategies—whether for retirement or unexpected events like death – sooner rather than later.  Planning now can save much larger tax bills in future.

Remember, gifting isn’t just about tax. It’s about ensuring that you, your business and family are secure. That may also change depending on whether you’ll stay in the UK, how much income you’ll need, and whether you want to reduce income tax or IHT.

 

How to protect your assets for the future

The challenge that business owners are facing today is not a new one – asset holders wish to preserve their hard-earned wealth, the state seeks to close loopholes in inheritance taxes in pursuit of revenue, redistribution or any other party goal. In ways both reassuring and dispiriting, the solution remains the same too – sound planning and time.

For those looking for a magic bullet that will help them pass on all their assets with no tax, the reality is that whilst there are still some options, quick fixes are now all but extinct. But with a proactive approach, owner-managers can still ring fence large parts of their estate and protect their families future’s while staying within the law.

One of the major difficulties for many is that this also involves an element of humility. The desire to keep principal control of your business and assets by hanging on to them as long as possible only serves to limit your choices when it comes to passing them on. That’s why it’s important to talk to a professional early and be clear-eyed in your goals – that remains the best and increasingly only way to make help assets go the distance.

Start a conversation with us today, about your options. 

Loading...