People are sometimes surprised that they can trigger capital gains tax (CGT) if they gift an asset or sell it at undervalue. Unfortunately, that is what the tax law requires.
Suppose that I have a piece of art worth £30,000 and I gift that to my cousin. I am treated as if I sold it for £30,000 and I am liable to CGT on any capital gain realised. My cousin is treated as if he bought it for £30,000.
However, there are circumstances in which I can avoid the CGT by making a ‘holdover relief’ claim. In this case, the gain effectively passes with the gift to the recipient.
When Holdover Applies
Gains can be held over in two scenarios:
(1) Specific asset types: most commonly, this is on shares in unquoted trading companies (including those listed on AIM). It also applies to assets used in a trade and certain agricultural assets.
(2) Chargeable lifetime transfers: transfers which give rise to immediate inheritance tax (IHT). Typically, this would be gifts to trusts during one’s lifetime.
In relation to (2), it’s worth noting that holdover can apply even if no IHT is actually charged (e.g., if the transfer is within the £325,000 nil-rate band). A settlor creating a trust for their family could transfer up to £325,000 to the trustees with no actual IHT being due, but still claim holdover relief on any assets transferred standing at a capital gain.
How it Works
If a gift qualifies under either of the conditions above, the gain arising is not taxable on the transferor, but the recipient must deduct the heldover gain from their acquisition cost. Effectively, this means they inherit the accrued gain.
Suppose that I own unquoted trading company shares worth £50,000 that I bought for £30,000. If I gift these to my brother and make a claim, I do not pay tax on the £20,000 realised gain, but my brother’s base cost is £30,000. If he sells the shares for £51,000, he pays tax on £21,000 (not just on the £1,000 increase since he acquired the shares).
Where you sell at undervalue (rather than gifting), any cash gain you make is still taxable. So, if I had sold the shares to my brother for £45,000 (when they were worth £50,000), I would be taxed on the cash gain of £15,000 and I can only hold over the remaining gain of £5,000. My brother’s base cost in the shares would now be £45,000.
When it Does Not Work
There are circumstances when a claim cannot be made or could be detrimental:
- You cannot hold over a gain to a nonresident person. If you could, then the gain could escape UK tax.
- If you hold over to a UK resident person but they leave the UK within six years, the gain is taxable on them when they leave. If they do not pay within 12 months, the tax can be charged on you as the donor.
- You cannot hold over to a settlor-interested trust or, if a holdover claim has been made in the past, any trust that you have an interest in.
- You cannot claim main residence relief on a property if it has previously benefited from a holdover relief claim on chargeable lifetime transfers (see 2 above).
While holdover relief is a valuable tool in the right circumstances, make sure you do not get caught out by these exceptions.
Practical Tip
If you’re making a gift, make sure you check if any CGT will be due and whether you can use holdover relief to effectively transfer the gain as well as the asset. Holdover relief can be very valuable if the recipient has reliefs or losses available which they could use on the deferred capital gain.