'Do I qualify for CGT holdover relief?'

Less well-known is the liability for capital gains tax of gifts of property and shares, irrespective of whether IHT is chargeable. 

This CGT liability, which is assessed on the increase in value between purchase and the date of the gift, is payable by the donor unless capital tax relief (or ‘holdover relief’) is claimed.

This relief transfers liability to the donee so that they only pay the CGT when the asset is sold. Although it does not exempt the gain from taxation, it does defer the tax payment until a later date. 

It is worth noting that CGT can be payable earlier than anticipated, even if the donee still owns the asset and the gain is held over. This would apply if the donee ceases to be UK resident within six years from the tax year they received the asset and they have not disposed of it.

Holdover relief is not available on the gifting of all types of assets, but may be claimed for:

• gifts of business assets;
• gifts of unlisted shares, for example in trading companies;
• gifts of agricultural land;
• gifts that are chargeable transfers for IHT purposes; or
• certain types of gifts that are specifically exempted from IHT.

Let's take a look at an example: Adam Smith acquired shares in an unlisted company in 2015 for £500,000. The shares are now worth £750,000 and he wants to gift them to his daughter.

Without a holdover relief claim, the gain would become chargeable on Smith in the tax year of the transfer.

However, the effect of a holdover relief claim is that a liability does not arise to Smith, but the daughter's base cost for a future sale is reduced by the gain of £250,000. Instead of her having a base cost of £500,000 it is reduced to £250,000. A future sale by the daughter at £1,000,000 would give rise to a gain of £750,000.

All is not lost, given that the statutory deadline to make a claim is four years following the end of the tax year of transfer.

In addition to the assets mentioned above, it is possible to gift other assets, such as a holiday home.

To qualify for the CGT holdover it is necessary to gift the property to a trust, not an individual. In this instance however, consideration also needs to be given to IHT as transfers to a trust are chargeable lifetime transfers.

Depending on what other gifts have been made, and the value of the property being gifted, there may be an immediate charge to IHT.

There would also be tax issues if the donor continues to benefit from the use of the property, and consideration would need to be given to the tax compliance costs in running a trust. 

Claims to relief are made by completing and submitting the HMRC helpsheet 295. The form reports details of the donor and donee, as well as details of the gift and its value.

HMRC has identified that some of these claims for relief are either not being made, or not being made properly. This is hardly surprising given the complexities involved (the form refers to different parts of the tax legislation), and often the implementation can be overlooked, but this has led to HMRC issuing nudge letters reminding both donors and donees of their obligations. 

The concept of nudge letters exists as it is government policy to educate and encourage taxpayers to pay the correct amount of tax at the correct time.

However, as HMRC has limited resources, it looks for trends where filing requirements are either misunderstood or not followed and issues these letters to push the compliance burden onto taxpayers. These types of letters have been issued in relation to various areas of taxation, including the taxation of rental income and offshore income.

The latest nudge letter from HMRC on holdover relief claims is specific to the 2021-22 tax year. It states that the recipient has 30 days to either amend their 2021-22 Self-Assessment return to remove the claim, or to submit/resubmit a valid claim form.

If action is not taken by that point, HMRC may amend the tax return, or open an enquiry into the form. This could lead to unnecessary discussions about undue tax, penalties and interest.  Failure to respond to HMRC’s campaign could mean additional tax being payable.

All is not lost, given that the statutory deadline to make a claim is four years following the end of the tax year of transfer.

However, it is recommended that advice is sought from a tax specialist as soon as possible if you have either received such a letter from HMRC, or if you have made a gift since April 6 2019 with the intention of claiming holdover relief. 

The adviser can review the position for you, resolve any questions you have on the original transfer and advise you on the next steps.

Guy Sterling is a tax partner at Moore Kingston Smith