The ‘modernisation’ of s165 holdover relief
17th July 2026
Posted in Articles by Andrew Marr
The issue
When assets are gifted, they are generally treated for tax purposes as being transferred at market value. This will often give rise to a ‘dry tax charge’ which is ‘dry’ because no cash has been received in the transaction. A notable exception to ‘the market value rule’ is when assets are transferred between spouses or civil partners, in which case the transfer takes place for tax purposes at no gain or no loss.
Section 165 holdover relief is a useful relief that allows an individual to reduce the capital gain arising on a gift of certain assets by rolling the gain over into the base cost of the asset for the recipient (subject to the donor and recipient making a joint election to claim this relief). The main asset we see this applying to in practice is shares in a trading company.
Our previous Tax Bite entitled “Don’t forget about the fiddly bits of holdover relief!” discussed the limitations of section 165 holdover relief due to the restrictions to the relief for ‘chargeable non-business assets’.
In summary, the amount of gain that can be rolled over using a section 165 holdover relief claim is apportioned to the value of the chargeable business assets divided by the value of all chargeable assets within the business.
Under the old rules, assets under the intangible fixed assets regime were not classified as chargeable assets for the purpose of this calculation. That meant that you could end up with strange results when there were only a few chargeable assets. However, HMRC have now introduced new measures to include these types of assets in the calculation.
Example
Using the example from our previous Tax Bite, Dave gifted 2,000 £1 ordinary shares in a trading company to his son which he had originally subscribed £2,000 for. The company consisted of goodwill worth £2 million, a share investment portfolio worth £2,000 and £500,000 of cash. The gift therefore gave rise to a capital gain of £2.5 million (£2,502,000 – £2,000) using the ‘market value rule’ above.
Previously, no holdover relief would have been available because the share investment portfolio was the only chargeable asset (cash and post 2002 goodwill did not count here as chargeable assets). On the basis that the share portfolio was a non-business asset, the above calculation results in an apportionment of 0% of the gain qualifying for holdover relief (£0/£2,000). This meant that the entire gain of £2,500,000 would be chargeable to capital gains tax on Dave without any scope for holdover relief. Many advisers felt (probably correctly) that this was an unintended consequence of the legislation, but it nonetheless remained quite a scary technical point.
Under the new rules, the mechanics of the above calculation are changed considerably because intangible fixed assets are now classified as chargeable business assets for the purposes of the holdover relief calculation. While the chargeable gain remains at £2.5 million, the percentage of the gain that can now qualify for holdover relief increases from 0% to 99.9% (£2,000,000/£2,002,000). This means that £2,497,502 of the gain can be rolled over into the base cost of the shares for his son, reducing Dave’s chargeable gain to £2,498.
Forbes Dawson’s view
This update to holdover relief is long overdue and finally fixes a longstanding anomaly that denied relief for transfers of genuine business assets. The change should make it easier to gift trading company shares to family members without giving rise to large chargeable gains and removes the need to dispose of non-business chargeable assets prior to making gifts. Anecdotally, we suspect that the import of this point was not being picked up in a number of cases and we are not aware of HMRC actively seeking to enforce it. However, we welcome the removal of the ‘fiddly bits’ of section 165.
