Wealth questions - Can I avoid CGT on paintings?

Several years ago, I bought two paintings for a few hundred pounds. But I recently had them valued for insurance purposes at about £120,000. I had been planning to give them to my son. Are there any capital gains tax (CGT) implications if I do this?

Tim Gregory, partner in the private wealth group at accountants Saffery Champness, says that you face a substantial capital gains tax (CGT) bill – although it may be possible to reduce or even avoid it altogether.

If you make a gift of an asset that normally attracts CGT, then you are deemed to have sold it at the current full market value, and you have to pay the CGT arising.

In this case, the difference between current value and original cost will mean a large CGT liability – but no realisation of cash to pay it.

If we assume that the paintings cost £500, the CGT will be 28 per cent of £119,500, which is £33,460 if you are already a higher-rate taxpayer. If you are a basic-rate taxpayer, then some of the £119,500 will be chargeable at 18 per cent. In either case, you may have some or all of your CGT annual exemption (£10,100 in 2010/11) available to reduce the gain before applying the tax rates.

There are some special rules for “chattels” which include paintings that are either bought or sold for less than £6,000 – and, in your case, the paintings were bought for less than £6,000. Under these rules, the chargeable gain is the lower of £119,500 (as calculated above) and five thirds of the difference between current value and £6,000. But as that works out at £190,000, the special rules do not help you.

But if you have a spouse or civil partner who is either a basic-rate (or non-) taxpayer, or who has some current CGT allowance available, you could transfer ownership of one of the paintings to him/her to reduce the CGT liability.

A transfer to a spouse is free of CGT. If your spouse then passed that painting to your son, the overall tax liability would be reduced by use of your spouse’s annual exemption (at a 0 per cent rate) and/or basic rate band (at 18 per cent rather than 28 per cent). Note, however, that the transfer to your spouse could not be conditional on him/her transferring the painting on to your son.

Alternatively, you could put the paintings into trust for your son. Assuming that you have not made substantial gifts in the last seven years, the gift to the trust would not create any inheritance tax (IHT) liability and would allow the CGT to be deferred until a later disposal of the paintings.

There would also be no IHT as and when the paintings were passed out of the trust to your son at any time in the future, assuming their value was still less than the IHT nil-rate band (£325,000 currently), and they would then be in his ownership with no tax arising at all. However, on any later disposal by him, the paintings would be treated as having cost the original few hundred pounds that you paid for them, and your son would be subject to the accumulated CGT liability.