Date posted: 26th Jun 2023
The potential to be charged capital gains tax (CGT) arises with the sale or gift of an asset.
Deferral of the charge is possible with reference to business assets using ‘hold-over’ relief, thereby avoiding an immediate CGT charge for the donor.
The donee takes over the donor’s CGT base cost, thus any gain is taxed on the eventual sale of the asset by the donee. Therefore it is regarded as a deferral of tax, rather than an avoidance of tax.
‘Hold-over’ relief is relevant to ‘business assets’ used by a trading business, profession or vocation but not in a non-trading company (i.e., an investment company).
The donor must have carried on the business either individually or in partnership, via a personal company (holding at least 5% of the voting rights) or as a member of a trading group whose holding company is the donor’s personal company.
There are also pitfalls to consider if the donee is not UK resident or the recipient is a company. As with many tax reliefs, there are conditions, one of which is that the asset must have been used in the trade throughout its period of ownership by the donor. Should the asset not have been so used throughout, there is a restriction. Similarly, where an asset has been used partly for business and partly not (e.g., business premises including a shop with a flat above), a just and reasonable restriction must be made to the held-over gain.
The final condition is specific to gifts of trading company shares where the company’s assets include non-business assets (invariably investment assets such as buy to let properties or listed share portfolios). In this situation, the held-over gain is restricted by the fraction A/B, where A is the value of chargeable business assets and B is the value of all chargeable assets.
For example, a gift of shares creates a gain of £200,000; the company has trading premises worth £3 million and an investment property worth £1 million. The amount of held-over gain is restricted to the ratio of chargeable business assets to total chargeable assets by multiplying the gain by the fraction 3/4, i.e., £150,000 can be held over and £50,000 is chargeable. So tax may be due, even though no proceeds have been received. We may be able to avoid this with some re-structuring in advance of a gift.
As ever, there are many complications in this area and specialist advice from us will be needed. Please contact us here if you need advice.