Capital Gains Tax (CGT) gifts holdover relief is an important relief for CGT purposes. It effectively allows a chargeable gain to be deferred (‘held over') and passed to the recipient of a gift. This '1 Minute Guide' provides a brief introduction to the subject. It is not intended to provide a definitive guide to CGT gifts holdover relief. Specific professional advice is recommended. Further information can be downloaded (in pdf format) from the Inland Revenue Helpsheet IR295 (‘Relief for gifts and similar transactions'). The HMRC website also contains the Revenue's own capital gains manual for staff and the public dealing with CGT and gifts.
10 Key Points
Why is gifts holdover relief necessary?
The gift of a chargeable asset, or sale at less than an arm's length price, is normally treated for CGT purposes as a disposal at market value (although inter-spouse transfers are normally exempt). Without holdover relief, a gift or sale at undervalue could result in a CGT liability, with little or no disposal proceeds from which to pay it.
Who can claim the relief?
Gifts holdover relief is available to individuals, or to the trustees of a settlement in some cases. The held-over gain is treated as reducing the base cost of the asset in the hands of the recipient. However, gifts holdover relief is generally not available unless the recipient is resident and ordinarily resident in the UK.
Which assets qualify for gifts holdover relief?
The relief applies to business assets, broadly comprising the following:
- Assets used for the purposes of a business carried on by the donor, his personal company or a group subsidiary of his personal company. A ‘personal company' is a trading company in which the individual owns at least 5% of the voting rights;
- Shares and securities in the donor's personal trading company or the personal holding company of a trading group;
- Shares and securities in an unquoted trading company or the unquoted holding company of a trading group (shares listed on the Alternative Investment Market are ‘unquoted' for these purposes); and
- Agricultural property (i.e. farm land and buildings) that would qualify for inheritance tax agricultural property relief.
A separate form of gifts holdover relief is also available in respect of gifts of non-business assets, if certain conditions are satisfied (see 4 below).
Does gifts holdover relief apply only to business assets?
A separate form of gifts holdover relief is available on certain disposals made by individuals or trustees. Holdover relief potentially applies to gifts on which inheritance tax is immediately chargeable (i.e. the disposal is not a potentially exempt transfer). The main types of immediately chargeable transfers are generally gifts to and from a discretionary trust. Holdover relief is available even if there is no actual inheritance tax liability, e.g. because the value of the gift is less than the inheritance tax annual exemption, or below the ‘nil rate band'. Transfers to beneficiaries from accumulation and maintenance trusts are also potentially eligible for holdover relief, if an inheritance tax charge would arise but for the special tax treatment for such trusts. Other disposals potentially qualifying for holdover relief include gifts of heritage property (i.e. works of art, historic buildings) and gifts to political parties.
Trustees of a settlement are eligible to make gifts holdover relief claims broadly in respect of the following disposals:
- Assets used in a trade carried on by trustees, or by a beneficiary with an interest in the trust assets;
- Shares or securities of a trading company (or holding company of a trading group) which is either unquoted, or in which at least 25% of the voting rights are owned by the trustees; or
- Agricultural land and buildings that would qualify for agricultural property relief for inheritance tax purposes.
Shares and securities
Gifts holdover relief is available on the disposal of shares or securities in an unquoted trading company, or the holding company of a trading group. The relief is also available in respect of quoted shares and securities, if the trading (or holding) company is the individual's personal company (or for disposals by trustees, if the trustees own at least 25% of the voting rights). An individual's ‘personal company' is one in which at least 5% of the voting rights are owned. The definition of ‘trading company' is the same as for taper relief purposes, i.e. a company (or group) whose business does not include non-trading activities to a ‘substantial extent' (broadly more than 20% of the most appropriate measure, such as income or assets).
Restrictions in relief
There are various potential restrictions in holdover relief. For example:
- For disposals of shares and securities, if the company is the individual's personal company (or if in the previous 12 months trustees making a disposal owned at least 25% of the voting rights) the held-over gain is restricted by reference to non-business assets (e.g. investments) which would give rise to a chargeable gain (or allowable loss) if sold by the company.
- For assets other than shares, if the asset has not been used wholly for trading purposes throughout the period of ownership, or if part of a building was used for the purposes of the trade and part was not, the gain eligible for holdover relief is restricted accordingly.
How does gifts holdover relief interact with CGT taper relief?
Gifts holdover relief is given after indexation allowance (which for individuals is only available up to April 1998, if appropriate) but before taper relief. A claim to gifts holdover relief on a disposal therefore results in the effective loss of taper relief for the donor. Taper relief on a subsequent disposal is calculated according to that individual's period of ownership, and whether the asset is a ‘business' or ‘non-business' asset.
There are certain rules to prevent gifts holdover relief being used for ant-avoidance purposes. For example, gifts relief is not available on disposals to the trustees of settlements in which the settlor has an interest, and can be clawed back or denied if the trust becomes settlor-interested within 6 years following the tax year of disposal. In addition, gifts relief is not available for transfers of shares and securities (but not other assets) to a company. There are also rules to effectively ‘claw back' gifts holdover relief, broadly if the transferee emigrates (i.e. becomes non-resident and not ordinarily resident in the UK within 6 years following the end of the tax year of disposal whilst still owning the asset).
Claims for gifts holdover relief
Gifts holdover relief must be claimed by the donor and donee. However, for gifts to the trustees of a settlement, the claim is made by the donor alone. A claim form is attached to HM Revenue & Customs Helpsheet IR295. The time limit for making a claim is within 5 years from 31 January following the tax year of disposal. However, in practice gifts holdover claims are often submitted with the self-assessment return relating to the year of disposal.
Finally, as mentioned previously, this '1 Minute Guide' provides only a brief introduction to gifts holdover relief, which is a potentially complex part of the tax legislation. Professional advice is recommended based on particular circumstances.
The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.
About The Author
Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.
Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms.
He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.
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