The making of a gift is a disposal for the purposes of Capital Gains Tax (‘CGT’). The basic rule is that tax is payable as if the asset gifted had been sold for its market value. But in some circumstances – including where the asset gifted is a ‘business asset’ – it is possible for donor and donee to elect (jointly) that the disposal be treated as made at such a price as results in neither gain nor loss being recognised. In effect, the gain that would otherwise be recognised on the disposal is ‘held over’ and becomes chargeable (on the donee) when the donee eventually disposes of the asset.
There is, of course, a whole panoply of rules about what assets qualify and the precise conditions to be met (as explored by us in our earlier article on CGT holdover relief): but the broad rule that a gain on a gift of a business asset can usually be ‘held over’ in this way will suffice for present purposes.
The gain can be ‘held over’ in full if there is no consideration for the gift: if it is a ‘partial gift’ (meaning that any consideration received is less than the market value of the asset transferred) the relief may be restricted.
How do these rules apply where business assets are transferred following the breakdown of a marriage or civil partnership?
The first point to bear in mind is that until the end of the tax year in which the parties permanently separate, no joint election is needed: any assets transferred (whether or not business assets) are automatically deemed to go across on the ‘no-gain, no-loss’ basis. It is therefore only in subsequent years (typically when assets are being divided up following the relationship breakdown) that the triggering of a tax charge becomes an issue. That may of itself be an incentive to sort these things out sooner rather than later.
The problem is the question of ‘consideration’.
HMRC formerly accepted that where an asset was transferred pursuant to a Court Order (even a Consent Order formalising an agreement between the parties), there was no ‘consideration’ and no bar to a joint ‘holdover’ election: the asset had been transferred not because the recipient had given consideration but because the Court had required the transfer to be made.
Unfortunately, that is no longer HMRC’s view. It is now their view that where an asset is transferred on the breakdown of a marriage or civil partnership it will be exceptional for this to be a gratuitous transfer potentially qualifying for holdover relief. Normally the transfer is not truly a ‘gift’ made for no consideration but is made because the recipient is giving something up – namely ‘rights which [the recipient] would otherwise have been able to exercise to obtain alternative financial provision.’ That amounts, in HMRC’s view, to ‘consideration’ of a value equal to the market value of the property transferred. This is the case whether or not the transfer is made under a Court Order. Consequently, holdover relief will not normally now be available.
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This article was also republished in the May 2021 issue of ICAEW TaxLine and is available here on the ICAEW website.