Reshma Johar outlines the circumstances when a claim for business asset hold-over relief could alleviate an immediate charge to CGT on the transfer of a business asset.
Capital gains tax (CGT) arising from a transfer of a business asset (or agricultural property) which was either an outright gift or sale at undervalue, could be reduced either partly or entirely by a holdover relief claim.
The relief (sometimes called ‘gift relief’) can be claimed on qualifying transfers on a non-arm’s length basis, where the disposal has been made on non-commercial terms. This can also include transfers between connected persons where the consideration falls below the market value of the asset (TCGA 1992, s 165, Sch 7).
What is a ‘business asset’?
If the disposal is an asset (or an interest in an asset), it needs to have been used by the transferor for the purpose of their trade, profession or vocation. The use by the transferor could be in their capacity as an unincorporated business, via their personal company or a member of a trading group of which the holding company is the transferor’s personal company.
If the disposal is shares or securities (not listed on a recognised stock exchange), it will need to be of a trading company or the holding company of a trading group which is the transferor’s personal company.
Business assets need to have been used by the transferor in a qualifying way. HMRC offers no guidance on how ‘used’ should be interpreted. A sensible approach is to assume that the trade, profession or vocation is being carried on as a going concern at least up until the point of the transfer. Where necessary, an adjustment may be required to establish how much of a gain could qualify for the relief, taking into account any private use adjustments.
Assets excluded from the relief include disposals of qualifying corporate bonds, disposal of shares or securities to a company or where the disposal could be eligible for holdover relief under TCGA 1992, s 260 instead (i.e. where the transfer would result in an immediate inheritance tax (IHT) charge).
What is ‘agricultural property’?
Relief could also apply to transfers of agricultural property (or an interest in property). Agricultural property means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish (subject to conditions) and includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.
Relief can only be claimed if the property meets the requirements of agricultural property relief for IHT purposes. Relief under the agricultural property rules would only apply where the property is not used for the purpose of trade, profession or vocation, as above.
How the relief works
For the transferor, the chargeable gain arising from the transfer of the asset is reduced by the amount of held-over gain (which could wipe out either part or the entire gain). The transferee will acquire the transferred asset with the held-over gain set against the base cost.
In the majority of cases, a joint claim will need to be made between the transferor and transferee. There is a specific claim form that will need to be completed per asset transferred ((tinyurl.com/HMRC-Gift-Relief-Claim). The form can be attached to a self-assessment tax return if one is prepared.
Deadlines
Claims for the relief need to be made to HMRC within four years from the end of the tax year in which the disposal was made.
Checklist
- What is the relationship between the transferor and transferee?
- Is there any actual consideration being given by the transferee (money or money’s worth)?
- What is the actual market value of the business asset?
- What is the asset and how was it used?
- What are the circumstances involved with the transaction, and does the deal between the two parties give the best outcome for both (this could be considered beyond financial gain)?
- Does the transfer form part of a series of transactions?
- Consider the residence position of the transferor.
Practical tip
The relief rules state the order to apply adjustments where the transfer is a sale at undervalue and has non-business use.
