Share and share alike
QUESTION: My wife and myself have built up a substantial share portfolio totalling £500,000. We have just completed an inheritance tax review of our joint estate which totals £2.4m. We do not need the income from the share portfolio and are thinking of gifting it to our two daughters, one is resident in Northern Ireland and one is resident in the Republic of Ireland. What are the tax implications?
ANSWER: For yourself and your wife, there are three taxes to immediately consider - capital gains tax (CGT), inheritance tax (IHT) and income tax (IT).
If the share portfolio has increased significantly in value since the individual stocks were purchased, then as the transfer to your daughters is a connected party transfer it is deemed to take place at market value which will trigger a UK capital gain or a capital loss if there has been a reduction in value. UK tax payers pay capital gains tax on share gains at either 10 per cent or 20 per cent depending on whether they are basic or higher rate tax payers.
You could consider gifting the shares over a period of time and using your CGT tax free annual exemptions however, your joint annual exemption is £25,000 and it would take too long to remove the entire portfolio from your estate this way. The best thing therefore is to analyse the entire portfolio to determine the level of gains, losses therein before taking any action.
From an IHT perspective, the gift will be a potentially exempt transfer (PET) in the UK meaning that after three years following the date of the gift, the standard inheritance tax rate of 40 per cent reduces by 8 per cent a year until the gift is completely exempt from IHT after seven years.
The removal of £500,000 from your estate will reduce your estate below £2m and therefore this will prevent the residential nil rate band (£175,000 from April 6 2020) from being tapered. This means that together yourself and your wife can have a total estate of £1m before any inheritance tax is levied on second death.
Given that your joint estate is just below £2m, you should consider further inheritance tax mitigation measures unless you feel that between now and your deaths, you will substantially deplete your estates in retirement.
Your daughter living in the Republic, however, will fall within the capital acquisitions tax (CAT) regime. This means that she can receive gifts totalling €335,000 from both yourself and your wife in your lifetime and any gifts above this threshold are taxed at 33 per cent in RoI. The gift therefore of a £250,000 share portfolio will substantially eat into this lifetime threshold.
Finally, there are obvious income tax implications of making the gifts to your daughters of the share portfolio as the dividend income will no longer be taxed on yourself and your wife rather it will become income in the hands of your daughters taxable in the UK for one daughter and the Republic of Ireland for the other.
:: Paddy Harty (email@example.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies