Do You Pay Capital Gains Tax on Shares You Give to Your Children or Charity?

Gifts to your children are taxed as a sale

When you give shares to your son or daughter, the law treats it as if you'd sold them at their market value on the day of the gift. Market value is what the shares would fetch if sold on the open market. You work out the gain as normal, using that value in place of a sale price, as GOV.UK explains. So you can owe tax on a gift that brought you no money at all.

The gain goes into your tax year with your other gains and losses. It uses your £3,000* tax-free allowance. Anything above that is taxed at 18%* while it fits in whatever is left of the £37,700* basic rate band after your income, and 24%* after that. The rest of how Capital Gains Tax works doesn't change. Your cost is what you paid, and if you've bought the same shares more than once, that's your Section 104 average cost.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

The same rule applies to gifts to grandchildren, parents, friends and unmarried partners. The exception is your husband, wife or civil partner. Shares you give your spouse while you live together are free of Capital Gains Tax.

What your child's cost is

Your child is treated as having bought the shares at the same market value. When they sell, their gain is the sale price minus the value on the day you gave them the shares. The rise while you held them counted as your gain, so it isn't counted again as theirs.

Your child will need a record of that value and the date. HMRC can check a valuation after the gift if you ask it to, through a post-transaction valuation check. Allow at least 3 months for an answer.

An example

Say you bought 1,000 shares in Company A for £10,000, including fees. They're worth £16,000 on the day you give them to your adult daughter. You're a higher rate taxpayer and haven't sold anything else this tax year.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

A year later your daughter sells the shares for £18,000. Her cost is £16,000, so her gain is £2,000. That's inside her own tax-free allowance, as long as she has no other gains that year.

Losses on gifts to family

If the shares are worth less than you paid, a gift to your child gives you a loss. You can't use that loss against your gains in general, though. Your children, grandchildren, parents, brothers and sisters are connected with you in tax terms, and so are your spouse's relatives.

A loss on a gift to a connected person can only be set against gains on other gifts or sales to that same person, while you're still connected. HMRC calls it a "clogged" loss. Unless you later give or sell that person shares that have risen, it stays unused.

Say you bought shares for £10,000 and they're now worth £7,000. If you sell them, the £3,000 loss can be set against your other gains. If you give them to your son, it's a £3,000 clogged loss that only counts against gains on disposals to him.

Children under 18

Giving shares to your own child who's under 18 has an income tax catch as well. Any income from what a parent gives their unmarried child under 18, dividends included, is taxed as the parent's income. It doesn't apply in a tax year where the child's income from that parent's gifts is £100 or less. The rule stops when the child turns 18 or marries, and it doesn't cover gifts from grandparents.

Children under 18 usually have shares held for them, for example in a trust. How that's set up affects the tax, so get advice from a tax adviser before making the gift.

Gifts to charity

Shares you give to a charity are free of Capital Gains Tax. The law treats the gift as made for neither a gain nor a loss, however much the shares have risen.

You can also deduct the value from your taxable income for the tax year of the gift. The amount is the market value of the shares on the day, plus any broker's fees for the transfer, minus the value of anything you get back from the charity. How much income tax that saves depends on your income tax rate.

The income tax relief only covers some investments. According to HMRC's helpsheet HS342, these are:

• shares and securities listed on a recognised stock exchange, UK or overseas
• shares traded on AIM
• units in an authorised unit trust
• shares in an open-ended investment company (OEIC)
• interests in certain overseas funds

Selling shares to a charity for less than they're worth is different. If the charity pays more than you paid, your gain is worked out using what the charity pays you, not the market value.

Giving shares to charity or selling them first

Take the same 1,000 shares, bought for £10,000 and now worth £16,000. Say you're a higher rate taxpayer and want a charity to have them or their value.

If you give the shares, there's no Capital Gains Tax and the charity gets shares worth £16,000. You deduct £16,000 from your taxable income. The downsides are that the relief only covers the investments listed above, and the charity has to accept the shares. You need records showing it did.

If you sell them first, you owe £720 in Capital Gains Tax, as in the example above, and have £15,280 left to give. A cash gift can get Gift Aid, which lets the charity claim an extra 25p for every £1 you give. On £15,280 that's £3,820, so the charity gets £19,100. As a higher rate taxpayer, you can also claim back the difference between the tax you've paid on the £19,100 and what the charity got back, through your tax return.

So selling first costs you £720 in Capital Gains Tax and leaves the charity more. Giving the shares avoids that tax and takes the whole £16,000 off your taxable income, so in this example it leaves you more. How big each difference is depends on your income tax rate and the size of the gain.

Shares that have fallen work the other way. A gift to charity is treated as no gain and no loss, so the loss disappears. If you sell them first and give the cash, you keep a loss to set against your other gains.

Telling HMRC

A gift to your child goes on your tax return like a sale, with the market value on the day as the sale price. The rules on whether your gains need reporting, and the boxes to fill in, are in how to report capital gains.

A gift of shares to charity doesn't create a gain to report. You claim the income tax relief in the charitable giving section of your Self Assessment return. HMRC's helpsheet HS342 says which box. If you don't fill in a return, contact HMRC with the details, and you'll get a refund or a new tax code. Either way, keep records showing you made the gift and that the charity accepted it.

Inheritance Tax and when to get advice

Shares left to someone when you die are different from gifts in your lifetime. Our guide to inheriting shares from a spouse shows how the cost is set in that case.

A gift to your children can also count for Inheritance Tax if you die within 7 years of making it. Gifts to charities have no Inheritance Tax.

Get advice from a tax adviser if the gift is large or involves a trust. The same goes for shares in a private or family company, or if either of you lives abroad. There are reliefs for gifts of business assets that this guide doesn't cover.