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Making the most of Gift Relief on the transfer of business assets

With a Capital Gains Tax (CGT) rate increase becoming more and more likely, you may wish to consider the use of Holdover (commonly known as Gift) Relief to transfer certain business assets to relatives or business partners for less than market value.

This article is part of our Quarterly Tax Digest for individuals.

Last updated: 2 December 2020

 

When gifting an asset or transferring it at less than market value to a ‘connected person’ for CGT purposes, the proceeds are taken to be the market value of the asset at the date of disposal. A ‘connected person’ can be any immediate family member or business partner (excluding spouses, who are covered by separate legislation). The legislation aims to prevent you from artificially realising capital losses by transferring assets to connected individuals at less than the market value, and using the losses to offset other gains.

 

However, for certain business assets, it’s possible to elect for Gift Relief.

  • Either, the individual making the transfer pays CGT on any gain arising from the actual proceeds received, but the remaining gain that would otherwise accrue using market value is deducted from the base cost of the gift recipient.
  • Or, if the asset is gifted without any charge, there is no CGT at the point of transfer, but the full gain that would accrue using market value is deducted from the base cost of the gift recipient.

This allows the individual to donate an expensive asset to a ‘connected person’ and either avoid having to pay CGT in the case of an outright gift, or only pay CGT on the tangible proceeds received.

 

It’s important to note that only certain types of assets will qualify for Gift Relief. Broadly speaking, this includes assets used for the purpose of a trade, profession or vocation; shares in unlisted personal trading companies; transfers of agricultural property; or transfers of residential property under the non-resident CGT regime. 

 

When disposing of these assets and realising a gain from the proceeds received, the individual donating the asset may also be able to utilise any unused Business Asset Disposal Relief (up to the current lifetime limit of £1million), in addition to the benefits of Gift Relief.

 

In order to use Gift Relief, both parties involved must make a joint election to HMRC within four years from the end of the tax year of disposal. This means you have until 5 April 2021 to claim a rebate for any CGT paid for assets gifted in the 2016/17 tax year. And you have until 5 April 2025 to claim Gift Relief on a donation made in the current tax year up to 5 April 2021.

A similar relief also applies to the transfer of business and non-business assets becoming immediately chargeable to Inheritance Tax, such as the transfer of assets to a trust.

About the author

Richard Pott

+44 (0)20 7556 1295
pottr@buzzacott.co.uk

This article is part of our Quarterly Tax Digest for individuals.

Last updated: 2 December 2020

 

When gifting an asset or transferring it at less than market value to a ‘connected person’ for CGT purposes, the proceeds are taken to be the market value of the asset at the date of disposal. A ‘connected person’ can be any immediate family member or business partner (excluding spouses, who are covered by separate legislation). The legislation aims to prevent you from artificially realising capital losses by transferring assets to connected individuals at less than the market value, and using the losses to offset other gains.

 

However, for certain business assets, it’s possible to elect for Gift Relief.

  • Either, the individual making the transfer pays CGT on any gain arising from the actual proceeds received, but the remaining gain that would otherwise accrue using market value is deducted from the base cost of the gift recipient.
  • Or, if the asset is gifted without any charge, there is no CGT at the point of transfer, but the full gain that would accrue using market value is deducted from the base cost of the gift recipient.

This allows the individual to donate an expensive asset to a ‘connected person’ and either avoid having to pay CGT in the case of an outright gift, or only pay CGT on the tangible proceeds received.

 

It’s important to note that only certain types of assets will qualify for Gift Relief. Broadly speaking, this includes assets used for the purpose of a trade, profession or vocation; shares in unlisted personal trading companies; transfers of agricultural property; or transfers of residential property under the non-resident CGT regime. 

 

When disposing of these assets and realising a gain from the proceeds received, the individual donating the asset may also be able to utilise any unused Business Asset Disposal Relief (up to the current lifetime limit of £1million), in addition to the benefits of Gift Relief.

 

In order to use Gift Relief, both parties involved must make a joint election to HMRC within four years from the end of the tax year of disposal. This means you have until 5 April 2021 to claim a rebate for any CGT paid for assets gifted in the 2016/17 tax year. And you have until 5 April 2025 to claim Gift Relief on a donation made in the current tax year up to 5 April 2021.

A similar relief also applies to the transfer of business and non-business assets becoming immediately chargeable to Inheritance Tax, such as the transfer of assets to a trust.

Speak to an expert
Speak to an expert

If you have already sold, or are considering selling qualifying business assets, or transferring assets giving rise to an Inheritance Tax charge, it’s worth considering the use of Gift Relief, particularly if the CGT rate does increase. It might not always be advisable in every situation for both parties, and professional advice should always be received before making any such election.

If you would like to discuss potential ways to effectively gift assets, as well as Capital Gains Tax or Inheritance Tax options, please fill in the form below and one of our experts will be in touch.

 

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