Ken Moody considers whether holdover relief for a gift of company shares may be restricted where the company lets part of its property.
Holdover relief (under TCGA 1992, s 165) on a gift of company shares may be restricted where the company owns chargeable assets which are not business assets and at any time within the 12 months ending with the disposal either:
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the donor was able to exercise 25% or more of the voting rights in respect of the company; or
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the company is the donor’s personal company (TCGA 1992, Sch 7, para 7(1)).
‘Personal company’ is defined for the purposes of section 165 as a company in which the donor can exercise at least 5% of the voting rights.
‘Business asset’ is an asset or interest in an asset ‘used for the purposes of a trade, profession or vocation carried on by the company’, or group, as the case may be (Sch 7, para 7(2)(a)).
The restriction applies by multiplying the gain by the fraction A/B, where A is the market value of business assets and B is the market value of all the chargeable assets. That part of the gain is held over; the rest is taxable.
Gift relief requirements
For example, Shoebox Ltd is an online shoe seller. It operates from a building which it owns on a substantial site, which also has an extension divided into three self-contained rental apartments. The major shareholder wishes to gift some of his shares in the company to his son and daughter as part of succession planning.
It is a requirement for gift relief under section 165 that Shoebox Ltd must be a trading company or holding company of a trading group, for which purpose it must not carry on non-trading activities ‘to a substantial extent’, or gift relief would not be available at all. That is a separate matter, but for the purposes of the example it is assumed that the company’s non-trading activity is not regarded as ‘substantial’.
The gift of shares is not an arm’s length disposal and the transferor and the transferees are ‘connected persons’, which means that the disposal is treated as being for consideration equal to the market value of the shares acquired. Whether the held-over gain is restricted as described depends upon whether there is non-business use of any chargeable asset(s) of the company, which leads to the question of what is an ‘asset’? There is no definition of ‘asset’ for CGT purposes, except that it includes ‘all forms of property’ (TCGA 1992, s 21(1)), so it must be given its natural meaning.
Same or separate assets?
There is some interesting commentary in HMRC’s Capital Gains manual at CG71800 in connection with part-disposals of land. It states:
‘A single acquisition of land, with or without buildings…should normally be regarded as the acquisition of a single asset for CGT purposes.’
So, in our example (which is taken from a real situation on which I advised), to decide whether the business premises and the extension are part of the same asset or are separate assets for CGT purposes we need to look at the history. As it happens, the land and buildings on it were all part of the same acquisition, so the entire asset is a business asset albeit that part of the asset is let.
Practical tip
As it happens, in our example the entire property was registered under the same legal title. From HMRC’s guidance at CG71800 the result would be the same even if the business premises and the flats had been registered under separate titles. But if the flats were acquired separately or the extension was a later addition, it would appear the extension would be regarded as a separate asset and relief under section 165 would be restricted.
