To give and to hold: capital gains tax holdover relief
Capital Gains Tax (“CGT”) is a tax on, er, capital gains. So how can it possibly be relevant when something is given away?
The answer is that, where an asset is given away (or sold for a price that is intentionally less than its market value), CGT is in most cases assessed as if the asset had been sold at market value. That’s not a problem if the gain isn’t chargeable to CGT, as is the case for things like cars, cash and, in some cases, chattels, but it may particularly be an issue with gifts such as land and buildings or shares.
When CGT was introduced in 1965 there was no special provision for dealing with gains arising on gifts: donors simply had to grit their teeth and pay whatever tax was due. Since then, a number of measures have been introduced, which we explain below, but, if none of these relieving provisions apply, the basic rule remains the same: making a gift can create a CGT cost for you.
A brief history of gift relief
Relief for gifts of agricultural land was introduced in 1975 and expanded in 1978 to include other business assets. 1980 was the higher-water mark, with the relief extended to cover all gifts.
Unfortunately, the relief was cut back again in 1989 so that for the past 30 years relief has been limited to just four categories of gift, namely: –
- Business assets
- Shares (or securities) in certain trading companies
- Agricultural property not used in a business
- Gifts immediately chargeable to IHT (essentially transfers into and out of trusts)
Apart from the introduction of some further restrictions in 1999 and 2003, that is how the law remains today.
In every case the effect of the relief is to “pass the tax parcel” to the donee. A simple example demonstrates the principle:
- You give your daughter a piece of land that is a qualifying asset with a “base cost” of £10,000 and market value of £100,000.
- Without the relief, you pay tax on a gain of £90,000 and your daughter’s base cost for a future disposal is £100,000.
- With the relief, you are treated as disposing of the land for £10,000, which also becomes your daughter’s “base cost” for a future disposal.
Unless the gift is to a trust (in which case you can unilaterally elect to “pass the parcel” in this way) the relief applies only if you and the donee jointly require it. So you may want to check, before making a gift, that the donee will co-operate in applying the relief.
The legislation refers to the gains as having been “held over”; consequently the relief is often referred to as “holdover relief”.
Finally, where there is a “partial gift” (meaning that the asset is not given away but is sold for a price that is intentionally below market value), some relief may be due: the computations can be complex and are not covered in this article.
Gifts of business assets
Unsurprisingly, “business assets” means, broadly, assets used in a business. For this purpose, “business” includes not only a trade, profession or vocation but also woodlands managed on a commercial basis or a business of letting furnished holiday accommodation. Crucially, “business” doesn’t include a business of property investment.
Usually, the asset must be used in a business that you carry on yourself (either personally or as a member of a partnership or LLP) but relief is also available if the business is carried on by your “personal company” – this is, broadly, one in which you personally have at least a 5% voting interest. Unlike for some other tax purposes, shares held by a spouse, civil partner or other close family member don’t count and, by contrast with Entrepreneurs’ Relief, it doesn’t matter if you have charged rent to the company for its use of the asset.
Relief may also be available to trustees but, in that case, the business in which the asset is used must be carried on directly either by the trustees themselves or by a beneficiary with an interest in possession. It can’t be carried on by a company.
For full relief, the asset must have been used in the business throughout the time you owned it. If that’s not the case, only partial relief will be due. This will also be the case if a property asset has been used only partly in the business (for example, a ground-floor shop with flats above) but note that there is no relief at all for the gift of an asset that was formerly used in the business if business use has ceased by the time of the gift.
Gifts of shares
Relief is available for a gift of shares in (or securities of) a trading company (or holding company of a trading group) where the shares/securities are unlisted or the company is your “personal company”. For trustees, a higher shareholding threshold, with a 25% voting interest, is required.
If any non-trading activities of the company (or group) are “substantial”, relief is not due. “Substantial” is (unhelpfully) undefined but is normally considered to be 20% based on an assessment of assets, turnover, profits and management time within the overall context of the company’s business. If, without being disqualified as having “substantial” non-trading activities, the company nonetheless owns chargeable assets that are not used in its trade, relief will always be restricted and (because of poor drafting of the legislation) will in some cases be unexpectedly denied altogether.
Oddly, however, there is no “look-back” as to the trading status of shares as there is for business assets. So, at least in principle, it is possible to contemplate the possibility of converting an investment company to a trading company immediately before gifting the shares, and even re-converting it to an investment company immediately afterwards; though in practice some circumspection would be advisable.
Gifts of agricultural property
Agricultural property that does not qualify as a “business asset” (typically because it is let on a tenancy to a company which is not your personal company or to a partnership in which you are not a partner) may nonetheless benefit from relief. The requirement is that the property would qualify for IHT Agricultural Property Relief (“APR”) on the date of transfer if that transfer were an IHT event. It is irrelevant whether APR would be available at 100% or only 50% and it makes no difference that the full market value of the property, which is used to calculate the chargeable gain, may be greater than its agricultural value. This may present planning opportunities to claim holdover relief for a building that would not by itself qualify for relief by including it as part of a transfer of agricultural land.
Note that the relief does not extend to a gift of shares in a company which owns but does not farm agricultural property, notwithstanding that, for IHT, a control holding of such shares could qualify for APR.
Gifts immediately chargeable to IHT
Where a gift gives rise both to a capital gain and to a chargeable transfer for IHT purposes, CGT holdover relief can be claimed. This is the case even where no IHT is actually payable because the transfer, although technically chargeable, is covered by the IHT annual exemption, nil rate band (“NRB”), APR or Business Property Relief (“BPR”).
The most common circumstance in which this is relevant is where an asset is transferred into or out of a trust – but take care: not all such transfers are chargeable. In particular, there is no IHT “chargeable transfer” when an asset is transferred out of a trust within three months of being transferred in or of being subjected to the ten year “periodic charge”: it follows that no CGT holdover relief is available in those circumstances.
This is the only circumstance in which holdover relief is available regardless of the nature of the asset. Accordingly, by passing an asset between individuals via the intermediation of a trust, it may with care be possible to some extent to replicate the effect of the old general holdover relief on a gift between two individuals.
Limitations and pitfalls
There are some restrictions and limitations to the relief in addition to those highlighted above. Usually these have been introduced to counter certain historic planning devices. In particular:
- A gain cannot be “held over” if the donee is not resident in the UK at the time of the gift and any “held over” gain usually crystallises and becomes chargeable if the donee ceases to be UK resident within six years of the gift
- Relief is not available on a gift made to a trust unless, broadly, the settlor of the trust is irrevocably excluded from benefitting under the trust
- A gain on shares or securities cannot be held over if the donee is itself a company
- Special rules apply to residential property: to counter a scheme common a few years ago, if a capital gain is held over when a residential property comes out of trust, the transferee is forever barred from making any claim to CGT “main residence” relief on any subsequent disposal of the property.
Notwithstanding these (and other) limitations and restrictions, the various CGT holdover reliefs can often provide a means of transferring assets within families and planning for succession without incurring a charge to CGT. Our experts can help navigate a way through the complexities to ensure that the maximum benefit is obtained from the reliefs available.
For more information, please get in touch with your usual BKL contact or use our enquiry form.