Don’t forget about the fiddly bits of holdover relief!
1st September 2023
Posted in Articles, Business Asset Disposal Relief by Andrew Marr
Apart from assets which are transferred between spouses and civil partners, the default position for capital gains tax purposes is that assets which are gifted are treated as being transferred at market value and this means that a ‘dry’ tax charge is triggered.
Simple example
Dave gifts a residential property to his son. The property cost £300,000 in 2007 and is now worth £600,000. The main tax consequence of this gift is that Dave has triggered a £300,000 capital gain. As this is a residential property, the gain will be taxed at a top rate of 28% or £84,000. For this reason, properly advised taxpayers will think twice before making such gifts.
The rules are much friendlier when shares in trading companies are concerned because ‘section 165 holdover relief’ may be available here. The key points about this relief are as follows:
1. Where it is claimed by both the donor and the donee, then the donee effectively takes on the tax history of the donor and the donor does not trigger a capital gains tax liability.
2. Various assets qualify but the most common that we see in practice are business assets and shares in certain trading companies.
3. Generally, shares in trading companies will qualify and the criteria here are similar to Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). The shares need to be unquoted or the shareholder must hold 5% of the votes.
4. The company must not have substantial non-trading activities. This is generally considered to mean no more than 20% non-trading activities (although this is not prescribed in the legislation).
5. It is only available for individuals and trustees.
6. Holdover relief cannot be claimed in respect of gifts of shares to a company.
The fiddly bit
The main fiddly bit relates to cases where companies have what are known as ‘chargeable non-business assets’. Here the portion of the gain that is available to be held over is worked out as follows:
% Held over gain = Chargeable business assets/total chargeable assets
This only applies to individuals who have held at least 5% of the votes in the 12 months before the gift.
Example
Suppose that in the above example Dave gifted shares in a trading company to his son. The assets consist of goodwill worth £2 million, a share investment portfolio worth £2,000 and £500,000 of cash. Here no holdover relief would be available because the share investment portfolio is the only chargeable asset (cash and goodwill do not count here as chargeable assets). On the basis that the share portfolio is a non-business asset, the above calculation results in 0% holdover relief. If the company had disposed of the portfolio before the gift then the ‘problem’ could have been solved.
Importantly chargeable assets only include assets within the capital gains tax regime and so post 2002 goodwill is not included. This means that donors of asset poor companies can very easily fall into this trap.
Forbes Dawson view
We see this point being missed time and time again and as you will see from the example above there can be times when the relief is fully restricted as a consequence of a minor investment holding. Often, this can be dealt with by ‘pre-gift planning’, such as selling the offending investments or maybe buying an expensive business property(!) and so a detailed look at the current balance sheet is advisable.
It would be an unpleasant shock for Dave in the above example if he were to receive a letter from HMRC trying to assess him on a £2.5m gain when he thought that the whole amount was covered by holdover relief.
This also reminds me of another piece of legislation which allows HMRC to collect a donor’s tax liability from the donee but that is a tale for another day!
