Low asset values affecting inheritance and capital gains tax

The current economic climate has seen the value of businesses, investments and property fall. While the future is still uncertain, it would be good to consider how to take advantage of depressed asset values.

When market values are low is a good opportunity to gift assets to family members that may have otherwise attracted a large capital gains tax bill. With share values at historic lows, share portfolios may be standing at a loss and could be gifted without paying any capital gains tax. Similarly, private companies will have seen a fall in value. Transferring shares in the business to the younger generations would mean that all future recovery in the value would fall outside the donor’s estate.

Gifts made during one’s lifetime are subject to the ‘seven-year clock’, after which point no inheritance tax is payable. If the donor does not survive the gift by at least seven years, inheritance tax is charged on the value at the date of transfer. Assets that have recently fallen in value would therefore incur less inheritance tax.

The massive current spending levels will need to be financed and this may force the government to change capital taxation. There have been recent calls to radically reform inheritance tax and the current reliefs, such as business relief, could be vulnerable. With this in mind, gifting company shares to a trust to ‘bank’ business relief may be an option. If the plan is to sell the business at some point, using a trust could also shelter some of the eventual proceeds from inheritance tax.

Meanwhile, for trusts that are no longer needed, now would be an opportune time for trustees to divide up the assets among beneficiaries and end them. While capital gains tax hold-over relief can usually be claimed on the appointment of trust assets, any inheritance tax exit charge would be lower for assets whose value has fallen since the pandemic started.