Tax experts in the UK are warning that Prince William may have triggered a significant capital gains tax by giving Kate Middleton the engagement ring he inherited from Princess Diana’s estate. The ring is said to be currently valued at about $400,000. According to the Daily Express, that value represents a significant increase from the date of death value of $240,000; the resulting capital gains due to William on the transfer of the ring could be as much as $45,000. The only way to avoid the tax is to make the gift conditional upon the marriage actually taking place.
In the UK, if you sell, give away, exchange or otherwise dispose of an asset and the result is a gain, you may have to pay capital gains tax. The rules are different depending on who you give the gift; for example, transfers to spouses are generally exempt. Otherwise, qualifying transfers over the personal exemption amount are taxed at a rate of 18% or 28%, depending on your total taxable income.
In the US, it’s a bit different. Capital gains tax is generally triggered by sale or other taxable event like a deemed sale. Merely making a gift is not considered a taxable event for capital gains tax purposes, though it may be taxable for federal gift tax purposes. The basis of the asset (remember basis?) is carried over from the donor to the new owner; if and when the new owner sells or otherwise transfers the ring, the basis for purposes of capital gains would be the same as the donor’s. So, for example, to use the example of Kate and William, Kate would take the ring at William’s basis of $240,000, which is the stepped up basis from Diana’s estate. If she were to sell the ring, she would use $240,000 as the basis for calculating her gain. However, William would not pay capital gains tax merely by gifting the ring to her.
Of course, this is all kind of a grand exercise in “what if?” I don’t think there’s a family or tax lawyer alive – in the UK or the US – who believes that ring is actually a completed gift. There’s no doubt in my mind that it was made very clear that the ring goes back if the marriage doesn’t take place.