Held Over Gains on Gifts Print

Gains arising on business assets which are gifted to an individual, or trustees of a settlement, may be held over provided that the transferee is UK resident. With regard to transfers to companies, relief is not available in respect of transfers of shares or securities, but relief may be claimed in respect of the transfer of other assets. For the purposes of this relief, a business asset includes an asset used for the purposes of a trade or profession carried on by the transferor, his personal company, or a member of a trading group of which the holding company is his personal company; or it is shares in a trading company, or the holding company of a trading group and is not quoted on a recognised stock exchange.

Hold over relief may also be claimed on gains arising on the transfer of non-business assets where the transfer of assets is made to the trustees of a Settlement where this gives rise to an immediate charge to IHT, or uses up all or part of the transferor’s lifetime IHT allowance. It is popular therefore to transfer assets up to the value of the lifetime IHT allowance into such a trust. Provided no chargeable transfers have been made by the transferor within the previous 7 years, no IHT is payable on the transfer, and the gain may be held over.

The hold over relief is given by reducing the cost of the asset in the hands of the transferee by the amount of the held over gain.

Example:

On 1 May 2010 James gave his daughter, Rachel, 30,000 shares in his family company. The shares were originally subscribed for at par by James in February 1990. The value of the shares on 1 May 2010 was £450,000. The shares are business assets. The Held over gain is calculated as follows:

£
James
Market Value on disposal by James 450,000
Deduct Cost in February 1990 30,000
Held-over Gain 420,000
Rachel
Market Value of shares 450,000
Deduct Held -over Gain 420,000
Base cost of shares for Rachel 30,000

James and Rachel must both sign an election agreeing to hold-over the gains. This is done by completing form HS295 which is on HMRC web-site. Where there is a gift between connected persons, the transfer is deemed to take place at open market value, and this value would normally have to be agreed with HM Revenue & Customs. Where a hold-over election is made, the donor and donee may both claim to defer valuing the asset as the actual value of the shares at the time of transfer has no relevance to Rachel’s future CGT liability provided that the value is higher than the original cost and that a taxable gain would otherwise arise at the time of the gift. As can be seen from the example above Rachel’s base cost for future CGT is the same as James’ base cost.

Continuing with the above example, Rachel sells the shares in November 2021 for consideration of £800,000. On the basis that Rachel is not entitled to Business Asset Disposal Relief , has no other disposals in the year and her only income is a small salary of £8,000 for some part-time work, her CGT liability is calculated as follows:

£ £
Disposal proceeds 800,000
Less Market Value of shares on acquisition 450,000
Deduct Held-over Gain 420,000
30,000
Gain 770,000
Less Annual exemption 12,300
Taxable Gain  757,700
CGT thereon 10% 37,700  3,770
20% 720,000  144,000
Total CGT liability 147,770

Hold-over relief may be clawed-back where in the case of an individual, the transferee becomes not-resident in the UK within 6 years from the end of the year in which the hold-over relief is claimed. However, where the individual leaves the UK for full-time employment overseas, and resumes UK residence within 3 years of leaving, provided he has retained the asset throughout the period, no claw-back should arise.

In the case of hold-over relief claimed on a gain arising on the gift to a trustee, there is no time limit to prevent the claw-back arising.

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