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Gifts are a common tool in tax planning. Families often give each other gifts, which is usual. Most of the time, it’s clear if a gift has been given and when. However, sometimes these matters go to court.
The word ‘gift’ appears in the UK inheritance tax laws but isn’t defined in these laws. For inheritance tax, a gift means what it usually means in everyday language.
For capital gains tax purposes, giving a gift counts as transferring ownership. It’s not about where the giver lives but where the item given is located.
What Defines a Legitimate Gift?
English law says a gift is when someone voluntarily gives something to someone else right away. Three things are needed: the giver must want to give the gift, they must actually give the gift, and the receiver must accept it.
A Real Case: Malcolm Scott v HMRC
In a recent court case, it was debated whether two sons had been given paintings by their parents. The mother, Dr Olive Scott, had passed away. Her sons, Malcolm and Alistair, couldn’t agree on how these paintings should be handled for inheritance tax.
HMRC argued that the paintings were still part of Olive’s estate, meaning no gift was made. Malcolm argued that the paintings had been given to them and moved to where they lived, although they didn’t have their own permanent homes.
The court agreed with Malcolm, stating that the paintings were properly given back in 1985 and have been held for the sons since then. So, for tax purposes, these paintings weren’t part of their mother’s estate after all.
Key Point
If a deed of gift had been used, this court case might not have been necessary. When giving a gift, especially a big one, it’s good to have something in writing. This helps prove that the gift was made.
Gifts are powerful tools for tax planning, but they need to be done right to count. Always keep clear records to avoid any confusion later.