Jennifer Adams considers the circumstances in which the charge to capital gains tax can be deferred using 'holdover' relief.
'Holdover relief ' (also known as gift relief’) is a tax relief that allows individuals to defer paying capital gains tax (CGT) when an asset is transferred to someone else, typically in the context of business asset transfers although in some cases it can also apply in relation to property transactions.
When claiming this relief, a capital gain that accrues to the donor is deferred and passed on to the donee. The liability to pay CGT is therefore ‘held over’ and only crystallises when the donee disposes of the asset, usually through a sale. Essentially, both the gain and the asset itself are transferred to the recipient.
To ensure a claim is allowed, the transfer must be a gift with little or no consideration. If the donee does pay something, this amount must not exceed the donor’s allowable cost; where the consideration is more than the donor’s allowable costs, this reduces the gain that can be held over by the excess.
Types of holdover relief
There are two types of holdover relief available; the type of holdover relief available depends on the type of asset gifted and whether the gift involves a trust, but both operate similarly.
(a) Gifts of business asset
The most common type of holdover relief is gifts of business assets (under TCGA 1992, s 165), which defers CGT on gifts made by individuals or specifically qualifying business assets (e.g., property from which the business is run) used for a trade, profession, or vocation.
The asset must be used in a business that is carried on by the donor (either personally or as a member of a partnership or limited liability partnership); however, relief is also available if the business is carried on by the donor's ‘personal company’ (i.e., one in which they personally own at least a 5% voting interest). Relief may also be available to trustees but, in this case, the business in which the asset is used must be carried on directly either by the trustees themselves or by a beneficiary with an interest in possession.
Unlike some other tax reliefs, no CGT liability arises when gifting a property or other valuable asset to a spouse or civil partner. However, when gifting to relatives, the gift is treated as a disposal at market value.
Note that property letting and other investment businesses are excluded from this relief, although agricultural cottages may qualify under specific conditions (see below).
(b) Transfer into a trust
The alternative form of holdover relief (TCGA 1992, s 260) expands the concept of holdover relief under TCGA 1992, s 165 by applying to transfers of any asset (including property) immediately chargeable to inheritance tax (IHT) or which would be chargeable except for an exemption or the availability of the IHT nil-rate band.
Most lifetime gifts made between individuals are potentially exempt transfers (i.e., no IHT charge arises unless the donor does not survive seven years) and as such transfers are not chargeable to IHT, therefore holdover relief under TCGA 1992, s 260 cannot apply in this situation. The most common circumstance where a holdover claim is available under TCGA 1992, s 260 is where an asset is transferred into or out of a trust. Settling the property into a trust is a deemed disposal for CGT purposes and a holdover claim potentially cancels any CGT liability for the donor, reducing the trustees' base cost of the property by the gain held over (effectively transferring the gain to the trustees). This is the only instance where holdover relief is available regardless of the nature of the asset.
On the transfer of property into a trust, the original owner of the property (the settlor) is treated as having gifted the property at market value. The ‘market value’ rule applies because the settlor and the trust are deemed to be ‘connected’ when the trust comes into existence.
To benefit from relief under TCGA 1992, s 260, the trust needs to have been created while the settlor is alive (assets transferred into a trust on death do not attract CGT) and where both sections apply, relief must be claimed under TCGA 1992, s 260 in priority to TCGA 1992, s 165.
Anti-avoidance rules
The availability of holdover relief under TCGA 1992, s 260 is subject to certain anti-avoidance rules. Specifically, neither relief can be claimed if the settlor retains an interest in the transferred property or if the trust established is classified as a ‘settlor-interested’ trust (i.e., broadly a trust from which the settlor, their spouse or civil partner, or minor children, can derive benefit).
Additionally, the holdover relief will be clawed back where a trust begins as a non-settlor-interested trust and is subsequently altered to a settlor-interested trust if the transfer is made within a specific timeframe (namely from the date of disposal and ending six years after the year of assessment in which the transfer was made).
Principal private residence relief
Claiming principal private residence (PPR) relief on a property transferred into a trust is possible, provided the trust's provisions permit a beneficiary to reside in the property as their primary residence.
However, to counteract potential abuse of this relief where a claim is made under TCGA 1992, s 260, the donee will be barred from making a PPR relief claim for any subsequent disposal of the property. This same restriction applies if a property is transferred out of the trust to a beneficiary rather than being sold outright.
Agricultural let properties
As detailed above, in a claim under TCGA 1992, s 165, holdover relief is available “if the gift is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by:
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The donor, or
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Their personal company”
Therefore, the gift of agricultural buildings, including a farm cottage, does not usually qualify as a ‘business asset’ on its own, typically because it is let on a tenancy rather than used in a business. However, relief can be claimed if the property is transferred as one asset together with farmland let on a tenancy basis.
The provision that permits full holdover relief under TCGA 1992, s 165 in this instance is contained in TCGA 1992, Sch 7, paras 1 and 2, which states that where an asset is disposed of ‘which is, or is an interest in, agricultural property’ and holdover relief cannot be claimed under the usual TCGA 1992, s 165 rules as the asset is not used in a trade, a claim can be made if the property is transferred with some land. The requirement is that the property would usually be charged to inheritance tax (IHT). Therefore, should the donor own land let to a farmer for agricultural use, it would qualify as agricultural property and so qualify for holdover relief under TCGA 1992, s 165 despite not being used in the donor's trade.
Note that IHT does not have to actually be paid, merely that an IHT liability arises, which would be the case should the value of the transfer be covered by the IHT nil-rate band.
Woodlands
Legislation specifically provides that the expression ‘trade’ under for the purposes of a holdover relief claim under TCGA 1992, s 165 includes the occupation of woodlands which the occupier manages on a commercial basis with a view to the realisation of profits.
Practical tip
Holdover claim can be advantageous because it allows the donor to pass on assets without any immediate tax burden, deferring any CGT charge, thereby making gifts more financially feasible.
