Claiming Holdover Relief – Are You Sure?

Ken Moody explains a few qualifications to capital gains tax ‘holdover relief’ for gifts of business assets.

Holdover relief for gifts of business assets is a very useful relief, but it does have limitations and it can be embarrassing if an adviser assures a client that a gain can be held over and then discovers it can’t. 

An election may be made (under TCGA 1992, s 165: ‘Relief for gifts of business assets’) to hold over a gain (by reference to market value) on the transfer of a ‘business asset’, whereby the gain is in effect transferred to the transferee. The election must be made jointly by transferor and transferee.

The gain which may be held over may, however, be restricted where there is actual consideration.

For example, suppose I own a business asset which cost £100,000 and is now worth £300,000. I agree to transfer it to my son for £150,000 and we make an election under section 165. The gain by reference to market value is £200,000, but I have received actual consideration of £150,000. To the extent that the actual consideration exceeds the cost of the asset, that part of the gain may not be held over. The held-over gain is, therefore, £200,000 - £50,000 and my son’s base cost is £150,000.

A rather obvious point is that the relief applies only to ‘business’ assets, which, in a nutshell, means:

a) an asset used for the purposes of a trade (property letting and other investment businesses is, therefore, excluded) carried on by the transferor as sole trader or in partnership, and

b) shares in a trading company or holding company of a trading group, which is the individual’s ‘personal company’.

The ‘personal company’ test is met by holding at least 5% of the ordinary share capital and voting rights.

The definitions relevant to holdover relief are the same as those that apply to CGT entrepreneurs’ relief and the substantial shareholdings exemption. Therefore, the test of whether a company is a trading company or holding company of a trading group depends upon there being no substantial non-trading activity. HMRC’s well-known ‘rule of thumb’ of what is ‘substantial’ in this context is 20% by reference to a range of indicators considered ‘in the round’, i.e. no one factor is conclusive (see HMRC’s Capital Gains manual at CG64090).

However, that is not the end of matters. A company may meet the trading company test while holding non-trading assets, and relief under section 165 may nevertheless be restricted. 

For example, suppose the asset referred to earlier was shares in my personal company, which owns a property used in the business worth £200,000 and quoted securities worth £50,000. The gain which may be held over is further restricted to the ratio of chargeable business assets to total chargeable assets, i.e. 200,000:250,000 = 4:5. So the held-over gain is £150,000 x 4/5 = £120,000. I am, therefore, taxable on £200,000 - £120,000 = £80,000.

Relief is also restricted by reference to any non-business use of an asset during the period of ownership having regard to the period and/or extent of non-business use, respectively, on a time basis or as is ‘just and reasonable’. 

Incorporation of a business may make use of section 165 as an alternative to ‘incorporation relief’ (under TCGA 1992, s 162). There are ‘pros’ and ‘cons’ to each route. However, relief is excluded from a transfer of a business asset consisting of company shares, where the transferee is a company. 

A couple of final points:

Relief must be claimed using form HS295 and must be signed by transferor and transferee (except where the transferee is a settlement). The relief claimed must be quantified (as required by TMA 1970, s 42(1A)), but given that the market value of the asset will usually not be readily ascertainable it is normal to opt to defer agreeing a value with HMRC by using an estimated (non-binding) value.