Gifting Personal Possessions, Chattels, CGT, and the 5/3rds Rule

As part of any estate and inheritance tax planning reduction exercise you may wish to give to loved ones some of your personal possessions and chattels before death. 

If you die after 7 years of the date of gift, the value of the gift is outside your estate and not included in any estate valuation and inheritance tax calculations.

If you die within 7 years of the date of gift, the full value of the gift is included in the estate calculations.   Note:  If you have already gifted £325,000 value in assets, money, or personal chattels within the last 7 years, then gifts of assets in excess of £325,000 would attract a reduction in value if made between 3-7 years ago.  This is known as taper relief.

Value of Personal Possessions and Chattels:

Remember, this is the market value of the item at the time of the gift and not its insurance replacement valuation.  Certain items such as jewellery items worth more than £500, antiques and cars will also need a professional or auctioneer's market valuation.

Why Make Gifts of Chattels When Alive?  ‘Non-Wasting Assets’

1. When you add up the value of your personal possessions and chattels, the combined total value included in your estate for inheritance tax can be huge.  £100,000 personal possessions and chattels can mean an extra £40,000 in inheritance tax.
2. Some personal possessions increase in value over time i.e., they are non-wasting, they do not depreciate value.  That antique, that painting, a vintage car, a personal number plate, a 17^th century pot and your Freddie Mercury signed album will likely all increase in value over time.
3. By gifting chattels today, if you die in say 2, 3 or 6 years, its value will have increased but the value at date of gift will be used in inheritance tax calculations.  You are mitigating IHT against future growth in value.
4. The 7-year rule, i.e., the value is outside your estate after 7 years.

Beware Capital Gains Tax (CGT)

When you gift an asset e.g., a property or shares, you may still be subject to capital gains tax even though you gave the asset away.   CGT is payable on transfer of assets for money or ‘money’s worth’.  This is the same for your non-wasting chattels and personal possessions.

Chattels Exemption for CGT

£6,000 Per Item Exemption:  If the market value of the chattel that you are giving away is £6,000 or less, it is exempt from reporting for capital gains tax.  This uses something called ‘holdover relief’ i.e., you do not pay CGT on disposal, but the new owner would pay if they then later disposed of it with the gifted chattel treated as if they owned it from the day you acquired it.

Chattels Worth More Than £6,000

These gifts are subject to capital gains tax payable by you, on disposal if you have exceeded your annual capital gains tax allowance already.

Usual CGT Calculation:  Value at Date of Gift less costs of acquisition and improvement/repair costs = ‘Taxable Profit/Gain’.  E.g., a chattel worth £8,500 but you paid £7,500 means a taxable gain of £1,000.

The Chattels 5/3rds Rule

If the value of the chattel at date of gift is more than £6,000 on gifting but you paid less than £6,000 for it, you are allowed to use the special 5/3rds CGT route. 

This means you have two different calculations for the value for capital gains tax and you can use the lower value for CGT purposes.

• Route 1 = Usual CGT Calculation (value on gifting less total price/expenses paid).
• Route 2 = Value on gifting less £6,000 Chattels Exemption X 5/3.

Example 1

Jack is gifting a classic car to his son.  He bought it for £5,500 and its auction value at date of gift is £7,500. 

• Route 1 = Usual CGT Calculation (value on gifting less total price/expenses paid).  £7,500 less £5,500 = Taxable Profit £2,000.
• Route 2 = Value on gifting less £6,000 Chattels Exemption X 5/3.  £7,500 less £6,000 Chattels Exemption = £1,500 X 5/3rds = £2,500.
• The lower Usual Value for CGT Calculation of £2,000 is used.

Example 2

Jane is gifting her slightly newer i.e., a less desirable classic car to her son.  She bought it for £5,500 and its auction value at date of gift is £6,500. 

• Route 1 = Usual CGT Calculation (value on gifting less total price/expenses paid).  £6,500 less £5,500 = Taxable Profit £1,000.
• Route 2 = Value on gifting less £6,000 Chattels Exemption X 5/3.  £6,500 less £6,000 Chattels Exemption = £500 X 5/3rds = £833.
• The lower Reduced Value for CGT Calculation of £833 is used.

Summary

Gifting non-depreciating, non-wasting chattels in life is a valuable way to reduce future inheritance tax liabilities and by using CGT rules wisely, you may not incur a CGT bill.  Making gifts of chattels worth individually less than £6,000 is desirable as you can use the Chattels Exemption.  When gifting chattels worth more than £6,000 make sure you do the Usual and 5/3rds calculation to get the best CGT result possible.

Keep Your Chattels?  What if I want to keep the chattel or personal possession in my home to continue to enjoy it, see it or use it?  See chattels Video 3 on Keeping My Chattels and a Chattels Licence:  "Gift But Keep"  Keep Gifted Chattels

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