Gift of Chattels – The Tax Implications | Peter Young, partner, Johnston Carmichael

There are a number of issues and pitfalls to be aware of when making gifts of chattels during your lifetime which can undermine the tax efficiency of such gifts, particularly should you gift an asset during your lifetime, but retain possession or use of the item.

Capital Gains Tax (“CGT”)

A chattel refers to any moveable property (or in Scotland corporeal movable property) other than money, examples include paintings, books, furniture and antiques. 

A gift of a chattel is treated as a disposal at open market value at the date the gift was made. Therefore, potentially a “dry” tax charge could arise on the gift of the asset should a gain arise in excess of the annual exemption (£11,100 in 2016/17). 

It is recommended that evidence of the gift and any correspondence pointing to the transfer is maintained by the donor and donee. 

Chattels exemption 

Certain chattels are exempt from CGT including motor cars and assets with a predictable life of 50 years or less (called wasting assets). The exemption does not apply if the chattels have been used in a business.

A gain, arising on the disposal of a chattel is exempt if the consideration is £6,000 or less. If there are joint owners, such as a husband and wife or civil partners, each has a separate £6,000 limit to utilise. 

Where the proceeds exceed £6,000, the chargeable gain arising on the disposal cannot exceed 5/3’s of the excess proceeds over £6,000. If the chattel is sold at a loss for less than £6,000, it is treated as sold for £6,000 to calculate the allowable loss. See below for an illustrative example:

Mrs Smith sells a painting and receives sales proceeds in May 2016 for £7,200

Cost was: £4,570
Chargeable Gain: £2,630
But gain limited to 5/3 x (£7,200 - £6,000): £2,000

Assuming the individual has made no other chargeable gains during the year, the gain would be covered by their annual exemption (£11,100).

Chattels comprising of a set or a collection (such a pair of chairs) are treated as separate assets unless they are sold to the same or connected persons, in which case the sales are added together for the purposes of £6,000 chattels exemption.


If the value of the gift is below the £6,000 exempt level, no tax charge will arise. If the value of the chattel gifted exceeds £6,000 and there is a chargeable gain, tax may not be payable as the gain, may be covered by the annual exemption.

The market value at the time the gift was made will be the base cost to the donee when calculating the CGT position on a future disposal by them. 

Inheritance Tax (“IHT”)

For IHT purposes, a gift of a chattel may fall in one of the many exemptions, for example:

  • Small gifts exemption of £250.
  • £3,000 annual IHT exemption. If the £3,000 exemption is not used in one year, it can be rolled forward and used in the subsequent tax year. Therefore, an individual could make a gift of up £6,000 IHT free. Joint owners, such as a husband and wife or civil partners, could potentially gift assets up to £12,000. 
  • Gifts from individuals to their children or grandchildren on the occasion of marriage of up to £5,000 and £2,500 respectively.  

If the gift does not fall within the exemptions above, it will be treated as a potentially exempt transfer. Provided you survive seven years from the date of the gift, the value of the gift would be out with your estate for IHT purposes. Once three years, has elapsed from the date of the gift, IHT tapering relief applies. 

Gift with Reservation of Benefit (“GWR”)

This is a long standing anti-avoidance provision to prevent a donor from continuing to benefit from an asset after it has been gifted. Where the rules applies, the asset is treated as remaining within the estate of the donor and therefore potentially liable to IHT on death. 

Should the donor wish to continue to “enjoy” the item gifted (e.g. retaining it in their home), to avoid a GWR arising, the donee can formally ‘lease’ the item to the donor by paying a full market rent for its use. The donee would need to declare this rental income to HMRC.

Should the donor gift the item, but continue to enjoy use of the item gifted, and the donor not pay a market rent for the use and enjoyment of the item gifted, then this would be treated for IHT purposes as a GWR. Therefore, the item gifted would be included within the donor’s estate for IHT purposes and potentially subject to IHT on death. 

Chattel’s leases

To avoid a GWR, it’s recommended the donor pays a full value market rent for the continued use and enjoyment of the chattel that has been gifted. 

Historically, a rental fee of 1% of the capital value is regarded as the norm for the purposes of satisfying the full value market rent condition. However, each case will be considered on its own merits. HMRC have indicated in their guidance the 1% figure does not include the costs of security and insurance, and these costs will be on top of this. 

The individual will need to be able to demonstrate the rental agreed for the chattel meets the following conditions: 
a.)    The lease was a bargain negotiated at arm’s length
b.)    Both parties were independently advised

In practice, this will involve both parties to the rental agreement instructing independent valuers to negotiate the “rent” for the chattel and the other terms of the lease. Only one auctioneer will need to be instructed to the carry out the valuation, the other party’s valuers will be expected to scrutinise the valuation prior to accepting the value of the item in question. 

The valuers will also negotiate the terms of the lease, such as notice provisions, insurance costs and rent reviews. Generally it is recommended the lease includes a regular rental review to ensure that a market value is being paid for the item to avoid a GWR. 

Paying a nominal rent for particularly valuable chattels are likely to be challenged by HMRC with risk being the gift of the chattel being caught by the GWR rules.  

However, following the decision of the courts in the Canadian case of Lloyd Youngman v The Queen, full consideration (i.e. market value) is what the lessor would have obtained if he had invested the same amount of cash as the value of the chattels on deposit or in Government securities. But given today’s low interest rates and yields on government bonds, following this approach could result in a lower rental payment. 

Pre-owned assets tax (“POAT”)

The POAT is an annual income tax charge which applies where a donor continues to benefit from a previously owned asset, but where the GWR do not apply. Following the introduction of the POAT, there are generally two options:

  • Accept an annual income tax charge; or 
  • Make an election and deem the GWR rules to apply. 

The amount chargeable to income tax will be as follows:
Notional interest payable for the period:   x
Less: payment made by the donor to the owner of the chattel:   (x)
Notional income:   x

The “notional interest” is the interest payable for the tax year if the interest at HMRC’s prescribed rate on an amount equal to the value of the chattel at the “valuation date”.  The Chattel is valued at 6 April 2005 (or when the asset first becomes chargeable) for the purposes of arriving at the first and subsequent annual pre-owned asset charges. Revaluations will be made at 6 April every 5 years. See example below for further details. 

Mr Jones gives away the freehold interest in a painting on 1 July 2014 to his adult son, but retains a lease which enables him continue to enjoy the painting which continues to hang in his drawing room. The value of the painting at the time it was gifted was £500,000 and Mr Jones pays a nominal rent of £50 per month. HMRC’s prescribed rate is 4%.

The notional income is calculated as follows:

Notional interest payable (£500,000 x 4%): £20,000
Less: payments made by Mr Jones: (£600)
“Notional income”: £19,400

This “notional” income will then be declared on the taxpayer’s self-assessment return and income tax paid in the normal way at their marginal tax rate. 

The POAT provisions do not apply to chattels which:

  • Ceased to be owned before 16 March 1986;
  • Sold for an arm’s length basis
  • Disposed to a spouse or civil partner
  • Gifts covered by the small gifts exemption (£250) or annual exemption (£3,000)
  • There is no charge if the value of the benefit is £5,000 per annum or less. 


It is important to ensure you obtain professional valuations before making a gift. Particular care needs to be taken should you gift an asset but continue to enjoy or use it during your lifetime.
Carefully drafted chattel leases negotiated by expert valuers representing each of the parties, coupled with payment of market rent by the former owner continuing to enjoy the assets, can help to avoid:

  • GWR and charges to IHT; and
  • continued benefits from pre-owned assets and charges to the POAT;

However, the costs of such planning need to be weighed against the tax savings; e.g. the rent payable on the chattel which is subject to income tax in the hands of the lessor and there will also be valuers’, tax advisors and solicitors’ fees to factor in.

Peter Young is Head of Private Tax at Johnston Carmichael