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CGT Holdover Relief means that you do not have to pay any tax on the gain in value of qualifying assets when you give them away or sell them at a reduced rate to benefit the recipient.
Instead, it will be up to the new owner to pay the CGT from the lower value received or the original cost of the disposed asset. CGT is not paid on gifts you give to your spouse or to a charity organisation since those transactions are automatically exempt from CGT.
Holdover Relief may be claimed for:
- gifts of business assets
- gifts of unlisted shares, for example in trading companies
- gifts of agricultural land
- gifts which are chargeable transfers for Inheritance Tax purposes
- certain types of gifts which are specifically exempted from Inheritance Tax
HMRC describes this situation as a disposal otherwise than by way of a bargain at arm’s length. HMRC’s tax manual has all of the technical information about how capital gains operate and the reliefs available.
Capital Gains Tax Holdover Relief is also known as Gift Holdover Relief and it is normally claimed whenever you pass on your whole business or just some assets which form part of your business to someone else in order to assist the buyer or for other reasons. The relief is claimable also on shares depending on the type of business and the percentages held, see below. You can give the assets away free of charge or you can sell them at a reduced cost lower than they are actually worth.
This type of tax relief is actually a kind of Capital Gains Tax deferral and is an accounting tool that can be valuable to a business owner, as any tax deferred in one year is money saved that does not need to be paid out yet. If you do things correctly you can create many tax deferrals through Capital Gains Taxes holdover relief that you might not have expected.
For example, in certain situations, no CGT will have to be paid if you are able to claim CGT Holdover Relief on assets which have come from a trust, and the recipient then goes on to sell them and declare them within their own tax-free exemption from their personal CGT allowance. This is because trusts do not have a tax-free allowance. If you can imagine this process taking place across a number of years, and with multiple recipients, then you will be saving a large amount of CGT in the long run.
What Are The Eligibility Conditions?
The eligibility for making a claim is dependant on the type of gift or reduced price sale that is made, whether it is tangible business assets or shares. If it is physical assets then you have to be the sole trader or the company owner. If shares then you need to have power of voting amounting to at least five percent of the company. The assets have to be owned by your own personal company or business.
A business asset can be anything to do with what the company sells or owns, so it may extend to include buildings owned by the company, any plant or machinery items, fixtures, fittings, or anything else deemed to be the tangible property of a business.
In the case of shares, they must not be registered with the stock exchange, and the main business activity of the company has to be in trading – either services or goods themselves. It cannot be a company just used for investment.
How Is Capital Gains Tax Holdover Relief Calculated?
As an example of how Capital Gains Tax Holdover Relief is calculated, we can say that if you have a qualifying business asset worth £1,000,000, that you bought for £300,000, but you sold your main this asset to your son for just £600,000, without Capital Gains Tax Holdover Relief your tax liability would be the effective tax rate on the full £1,000,000 market value. With CGTHR, you would not pay tax on that excess market value £400,000 which has been ‘held over’. It would be your son who pays tax on that when it comes time to sell.
Some of the assets this relief can be claimed against include: business assets, shares which have not been listed on certain exchanges, land used for agricultural purposed and some transfers on which inheritance tax would usually be due. You cannot claim this on gifts made to charities, and the assets cannot be works of art.
How To Claim For Capital Gains Tax Holdover Relief?
Unlike some other forms of tax relief, Holdover Relief is not applied to a sale automatically, so a claim needs to be made. It is important that you understand how to make a claim correctly, as there are a few mistakes you could make which you may not be aware of. It is advisable to work with an accountant or some other financial advisor so you make the claim as accurately as possible and obtain the maximum amount of relief possible.
You should also consider the fact that relief can be restricted if the gift was overpaid for when originally purchased. I.e., costing more than the asset was purchased for originally.
There are also little known circumstances which may prevent relief being granted. For example, if a certain building has dual purposes, such as an office within a residential building, or part of the building being used for dwelling purposes – a flat accessed by a shop entrance or adjacent but still part of the same building.
There is also the matter of whether the recipient is a UK resident or non-resident. If you are a non-UK resident during the disposal of the asset then no UK CGT may be payable but HMRC may claw back UK CGT if you then become UK tax resident within 5 years of the end of the ta year of the disposal. If this occurs, you then may become liable once again for the Capital Gains Tax on the asset.
Here at Key Business Consultants, we can provide expert advice to avoid these common pitfalls, and ensure that you are fully aware of all the circumstances surrounding your claim.