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Gift Holdover Relief: Defer Capital Gains Tax on Gifted Assets

Published by Shailesh Sapkota
Posted Date: July 10, 2024 , Modified Date: July 16, 2024

Navigating the complexities of taxes and asset gifting can be daunting, but Gift Holdover Relief offers a valuable solution. This relief allows individuals to transfer business assets or family heirlooms without the immediate burden of Capital Gains Tax (CGT), providing a strategic advantage in estate planning and facilitating a smoother transition of wealth.

What are Gift Holdover Reliefs?

Gifting an asset is a chargeable disposal that makes the donor liable for CGT. However, since the donor does not receive any funds, a relief, known as the Gift Holdover Relief, is available to them.

Gift Holdover Relief, also known as Gift Relief or Holdover Relief, is a CGT relief available in the UK that allows individuals to defer (holdover) the gain until the donee (the person receiving the gift) sells the gifted asset.

Example 1 

Mr Peter has a business asset initially purchased for £60,000, which qualifies for Gift Holdover Relief. When the market value reaches £180,000, he gifts the asset to his cousin, Mr Richard, without any consideration.

Since the asset qualifies for Gift Holdover Relief, the gain of £120,000 (£180,000 - £60,000) is held by Mr Peter, who therefore pays no tax at the time of the gift but must file a CGT return.

However, when Mr Richard (the donee) sells the asset, he must account for this held-over gain by adjusting the acquisition cost. The revised acquisition cost, also known as the base cost, will be the original acquisition cost minus the held-over gain.

What Assets Qualify for Gift Holdover Relief?

The assets that qualify to claim Gift Holdover Relief are:

Business Assets

Holdover Relief is available for business assets that:

  • are wholly used in the business of the donor

Such business includes:

  • sole traders or business partnerships
  • personal companies where the donor holds at least 5% of voting rights

If the asset is only partly used for business, the donor can get partial Gift Holdover Relief.

Shares

Shares qualify for gift holdover relief if they are:

  • shares or securities not listed on any stock exchange
  • shares or securities in the donor’s personal company

Additionally, the shares must be in a company whose main activity is trading.

Agricultural Land

While agricultural land does not qualify as a business asset (because it is not used for trade activities by the donor), it can qualify for Gift Holdover Relief if it is agricultural property for Inheritance Tax purposes.

Chargeable Transfer for Inheritance Tax

Holdover Relief is available if the disposal is a chargeable transfer for Inheritance Tax purposes but not a Potentially Exempt Transfer (PET).

The main examples of a lifetime chargeable transfer are when an individual:

  • gives an asset to the trustees of a trust (other than a disabled trust)
  •  becomes entitled to the property of a relevant property trust

How do Gift Holdover Reliefs work?

To claim Gift Holdover Relief, individuals must complete a separate form for each disposal. The donor and the donee must claim jointly for the relief, except when transferring to the trustees of a settlement, in which case only the donor claims.

Example 2 

Mr Peter has a business asset purchased for £60,000, which qualifies for Gift Holdover Relief. When its market value reaches £180,000, he gifts it to his cousin, Mr Richard, for no consideration. The gain of £120,000 (£180,000 - £60,000) can be held over by Mr Peter. Therefore, Mr Peter pays no tax while gifting but must file a CGT return.

Five years later, Mr Richard sells the asset for £250,000. The acquisition cost is £180,000, but since the gain was held over during the gift, Mr Richard calculates the base cost as the acquisition cost minus the held-over gain. Thus, the base cost is £60,000 (£180,000 - £120,000). The capital gain for Mr Richard is £190,000 (£250,000 - £60,000). This is how Gift Holdover Relief works.

What are the Benefits of Gift Holdover Relief?

Gift holdover relief offers several significant advantages, particularly in the realm of estate planning and financial management. Here are the key benefits:

Deferred Capital Gains Tax

Deferred Capital Gains Tax - Gif Holdover Relief

One of the primary benefits of gift holdover relief is the deferral of capital gains tax (CGT). This means that the donor does not have to pay CGT at the time of the gift. Instead, the tax liability is transferred to the donee, who will be responsible for paying the CGT when they eventually dispose of the asset. This deferral can provide immediate financial relief and flexibility for the donor.

Enhanced Estate Planning

Gift holdover relief is a valuable tool in estate planning. By deferring CGT, individuals can transfer assets without immediate tax implications, potentially reducing the overall value of their estate. This reduction can lower the estate’s liability for inheritance tax, making it easier to pass on wealth to future generations.

Continuity for Family Businesses

For family-owned businesses, gift holdover relief can facilitate the smooth transfer of business assets. By deferring CGT, family members can continue to run the business without the immediate financial burden of a large tax bill. This benefit ensures the continuity of the business and supports long-term family ownership.

Conclusion

Gift holdover relief is a powerful tool in the realm of asset gifting and estate planning, offering significant advantages such as deferred capital gains tax, enhanced estate planning, and the smooth transfer of family businesses.

By understanding how this relief works and leveraging its benefits, individuals can effectively manage their wealth and secure financial stability for future generations. Whether you are a business owner looking to pass on your enterprise or someone planning your estate, gift holdover relief provides a strategic advantage, making the process of transferring assets both tax-efficient and straightforward.

Need more expert advice on Gift Holdover Reliefs?

Contact us today for efficient and
hassle-free assistance.

Shailesh Sapkota
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