Reshma Johar looks at how holdover relief and potential restrictions can apply.
This article follows on from my previous one (‘Relief is at hand’), which reviewed the circumstances when a claim can be made to defer a capital gains tax (CGT) liability from arising (under TCGA 1992, s 165), including a handy checklist.
When considering holdover relief, it may be necessary to consider anti-avoidance provisions as well as whether the transaction falls within the employment related securities legislation.
Case study 1: Transfer of a business asset
Lisa and Tina are sisters who jointly run a tech company based in Manchester. Lisa has reduced her hours over the years and would like to give 25% of the shares to Tina. Lisa will be treated as making a disposal for CGT purposes, which will be deemed to take place at market value because of the connection. The market value of the shares is £60,000 and was originally acquired for nominal value, £25. The gain stands at £59,975.
A holdover relief claim can be jointly made, resulting in the gain being eliminated for Lisa and the acquisition cost of the shares for Tina being £25 (i.e. £60,000 – £59,975).
In order for a disposal of shares to benefit from holdover relief, the company needs to be a trading company or the holding company of a trading group, which broadly means that the company is carrying on trading activities which do not include to a substantial extent comprise activities other than trading ones. HMRC interprets ‘substantial’ as being more than 20%. This is established by reviewing the turnover, expenses, time and energy spent by the directors, assets and the balance sheet.
In addition, where shares are gifted by a person owning at least 5% of the shares in a personal company, which holds non-business assets such as an investment property, then a restriction will apply on any holdover relief claim. The formula applied to determine how much of the gain can be held over is chargeable business asset / total chargeable asset.
Case study 2: Consideration received below market value
Natalie bought a factory in Leicester 40 years ago, which has always been used by her business making specialist office equipment. Her son Stavros has been working for the business for several years and will soon be gaining the reins to her business. Natalie will be transferring the factory to Stavros for £100,000. She had acquired the factory for £85,000. Natalie will be treated as making a disposal for CGT purposes, which will be deemed to take place at market value because the transaction is not made at arm’s length. The current market value is £650,000. Without considering the actual amount paid by Stavros, the gain is £565,000.
In this instance Natalie is receiving some money in return when giving the factory to Stavros. This will be treated as a sale at undervalue as Stavros is not paying the market value. A joint claim can be made to holdover part of the gain arising from the gift. The starting position here is to calculate the gain excluding the consideration actually paid. The next part is to work out the excess proceeds, which in this case is £15,000 (£100,000 actual payment less £85,000). The difference between £565,000 and £15,000 will be the amount that will be available to holdover. Natalie will be subject to CGT on £15,000.
If Stavros had paid either the value equal to the original cost of the factory or less than no excess proceeds would arise, and Natalie would not be subject to an immediate charge to CGT. In addition, full holdover relief would be available.
Case study 3: Relief restriction for non-business use
Akbar and Seema are father and daughter running an events company based in Bristol. The business is operated via a commercial property owned by Akbar, which he would now like to gift to Seema. Akbar acquired the property 20 years ago and prior to the events company occupying the property, it had been rented out on a commercial basis. Akbar will be treated as making a disposal for CGT purposes, which will be deemed to take place at market value because of the connection. The market value of the property is £300,000 and was originally acquired for £100,000. The gain is therefore £200,000.
Whilst a joint claim for holdover relief is available, a restriction will be applied as the property was not used in the business throughout the ownership. If the property was only used by the business for 10/20 years, then only 50% of the gain arising from the gift is held over. The remainder 50% of the gain is subject to CGT.
A further adjustment is required if only part of the property is used by the business. If this is required, the time apportionment is carried out in priority.
Practical tip
Always conduct a fact-finding exercise beforehand, as gifts or sale at undervalue may not always result in gains being fully held over.
