1. Overview of Gifts Tax Relief
There is no general holdover relief on a gifted asset i.e. capital gains which may accrue on the gifted asset cannot be ‘held over’ until it is disposed of by the recipient.
Business asset transfers are subject to tax relief.
Asset gifts subject to Inheritance Tax (IHT) (or would be but for the nil rate band) are subject to tax relief. However, certain exceptions to GiftsRelief apply.
2. Business Assets: s165 TCGA 1992
The basic tax relief provisions under U.K. tax law for business assets are as follows:
- Where an individual makes a disposal of a relevant business asset otherwise than via an ‘arm’s length’ agreement.
- Where an individual makes a joint claim with the recipient to hold over the gain.
- If the recipient is a trust, the asset giver can make the claim.
- Tax relief must be claimed within four years after the end of the tax year in which the disposal took place; it is not automatic.
- Gifts and to transfers at ‘undervalue’, where an element of ‘consideration’ below the market value is paid are eligible.
- The asset is used for the purposes of the profession or vocation of the person transferring, including when they are a member of any relevant partnership.
- The asset belongs to his / her personal company, or the giver is a member of a trading group of which the holding company is their personal company.
- The asset transfer consists of shares or securities of a trading group, or the holding company of a trading group, where it is the transferor’s personal company and it is not listed.
- Holdover relief may apply where Agricultural Property Relief (APR) for IHT purposes applies under s115 Inheritance Tax Act (IHTA) 1984. This applies even if this property is not used in the trade of the transferor (Sch 7 TCGA 1992 under s165). The relief only applies to the inherent value at the time of transfer; i.e. holdover relief refers to the nature of the asset, not its financial value (relief is applicable on the whole asset).
Gifts relief does not apply where:
- S260 Holdover Relief applies.
- The transferee is a company receiving share disposals.
- A recipient is non-resident.
- A recipient of an asset transfer is a company controlled by non-residents, who are connected with the gift giver.
- Anti-avoidance legislation also limits Holdover Relief in specific circumstances, which you may need to speak to your tax advisor about.
A personal company of an individual is defined as one where he has at least 5% of the voting rights in the company. For definitions for a trading company, holding company and trading group check s165A TCGA 1992 of FA 2008.
Company Tax Avoidance Provisions
Anti-avoidance legislation applies to gifts on or after 10th December 2003 in some cases where the donee is the trustee of a settlement, where certain “relevant disposals” apply.
Exceptions include where the settlement is for a disabled person or for a heritage maintenance fund. However exceptions even apply here, too. e.g, if a ‘settlor-interested settlement’ applies after disposal. These include an individual settlor or trusts under which any settlor, spouse or dependants may benefit (FA 2006).
Also:
If Gifts Holdover Relief was obtained in relation to an earlier disposal by an individual who, immediately after the relevant disposal, has an interest in the settlement.
If a relief eligible settlement subsequently becomes a settlor-interested settlement before the relief is claimed.
If Gifts Holdover Relief was obtained for an earlier disposal by someone who subsequently acquires an interest in the settlement after Gifts HoldoverRelief was claimed, relief obtained may be clawed back.
3. Non-Business Assets (s260 TCGA 1992):
Obviously, this article serves as an introduction to the area of Gift Relief and cannot cover all circumstances. We recommend if considering making a claim for Gift Tax Relief and you are uncertain about which rules apply to you, you can avoid penalties and potentially gain from professional advice from tax accountants such as Meer & Company who specialise in Holdover Relief.
Anti-Avoidance Provisions
Anti-avoidance provisions cover a wide set of circumstances. U.K. tax avoidance rules apply if private residence relief applies to all or part of a gain, on a “later disposal” by an individual or trustees.
Where private residence relief is ignored, calculating the gain for that disposal would involve a reduction in the ‘allowable expenditure’ figure under s260, whether there is more than one such earlier disposal, or more than one such claim.
The order in which two reliefs have been claimed also has financial implications. So, for instance, if a claim to holdover relief is in existence at the time of the later disposal (or, for trustees, at the time of a claim for private residence relief) then the private residence relief provisions are no longer applied.
If a Holdover Relief claim follows a disposal in respect of which Private Residence Relief was given the PRR is withdrawn and all necessary tax adjustments may be made. When Holdover Relief is revoked, the law is as if your claim was never made. If earlier disposals took place some transitional rules may apply.
Basic provisions are such that:
- General relief applies for assets on which Inheritance Tax is due is available under s260 TCGA 1992, taking precedence over s165.
- The asset transfer must be a chargeable transfer for IHT purposes, or specifically exempt from IHT (e.g. within s71IHTA 1984).
- Potentially exempt transfers (PETs) are not covered, even if the transfer is subsequently chargeable because the donor dies.
- It does cover transfers that would be chargeable, but for a specific relief such as BusinessProperty Relief (BPR) or APR. Since FA 2006 now covers transfers to most trusts, not only discretionary trusts.
- For s260 to apply a donor must be an individual or the trustees of a settlement.
- The recipient must be resident or ordinarily resident in the U.K. – not treaty non-resident – and cannot be a company. Ordinary residence status ceased on 6th April, 2013.
The basic format of the claim and how the relief is given is as for relief under s165 TCGA 1992.