When a business gives away assets, or sells them for less than they are worth in order to help the buyer, it might be eligible to claim holdover relief. This is a form of capital gains tax deferral.
To help directors understand holdover relief and whether they are eligible for it, in this guide Clarke Bell looks at what holdover relief is and how it works.
What is holdover relief?
In order to understand how holdover relief can help someone who has gifted or sold an asset at below market value, it’s important to recognise that Capital Gains Tax is calculated on the full market value of an asset not the price at which it was sold.
Therefore, if you gift someone an asset, or sell it below its market value, you may still be liable for Capital Gains Tax on the full market value not the value at which you sold the item.
Claiming holdover relief means that you won’t pay Capital Gains Tax on the full market value of the asset when it is given away or sold below market value, instead the liability will be “held over” until the next sale by the recipient.
For those unfamiliar with Capital Gains Tax, next, we will briefly outline what it is and how it works.
When a director closes or sells their business, they will be required to pay Capital Gains Tax on any profits they have made. This is applied to the overall profits that the business has made, over the tax-free allowance threshold of £12,570, and is charged at 20%.
However, holdover relief allows a director to avoid paying Capital Gains Tax in certain circumstances.
In effect, holdover relief passes the tax obligation onto the recipient of the gift.
So, let’s say a director gives their child some land that has a base cost of £20,000 and a market value of £200,000.
Without holdover relief, you would pay tax on £180,000 and your child’s base cost for a future disposal is £200,000.
However, with holdover relief, it is instead seen that you have disposed of the land for £20,000 which means this is what becomes your child’s base cost for a future disposal of the land.
When can I claim holdover relief?
In order to claim holdover relief, there are a set of circumstances you must meet.
If you are giving away business assets, then you must be either a sole trader, business partner or you must have voting rights of at least 5% in the company.
To be eligible for full relief, the business asset you are selling or giving away must have been used in the business during the time you have owned it. In cases where this isn’t true, only partial relief will be due.
Business assets refer to most assets used in a business, such as assets used for the purposes of trade and shares in a trading company or holding company of a trading group. However, this excludes a business of property investment.
If you are giving shares away, then they must be from a company that is not listed on a stock exchange or a personal company.
For trustees of the company, a higher shareholding threshold is required, with a 25% voting interest.
The company must be one that trades, meaning it provides services or goods, rather than being a non-trading company, including those whose main activity is investment.
Limitations of holdover relief
There are some restrictions to holdover relief.
For example, a gain can’t be held over if the recipient is not a resident of the UK at the time of the gift. Any held over gain can also become chargeable if the recipient stops being a UK resident within six years of receiving the gift. In this case, the tax will become due immediately when the recipient moves away from the UK. If the recipient can’t pay back the tax owed, the responsibility can fall onto the trustees to settle the liability.
Furthermore, relief isn’t available on a gift that is made to a trust unless the settlor of the trust is excluded from benefitting under the trust.
A gain on shares can’t be held over if the recipient of the gift is a company itself.
How to claim hold over relief
It is important to note that holdover relief is not automatically applied.
Instead, it must be claimed for by the giftee/seller and the recipient. Together, both parties must notify HMRC by using the HS295 form.
This form must be signed by both the transferor and the transferee. The relief you are looking to claim must be quantified. However, as it is usually the case that the market value of the asset isn’t readily available, it is common to opt to defer to agreeing to a value with HMRC, which can be done by using an estimated and non-binding value.
What other types of relief are there from Capital Gains Tax?
Another common type of relief from Capital Gains Tax open to sole traders, partners and shareholders is Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
This relief reduces the amount of Capital Gains Tax that you would usually owe when disposing of:
- All or part of your business
- Assets of your business that have stopped trading
- Assets that you owned and used that you are leaving, such as premises
- Shares in your personal trading company
Business Asset Disposal Relief lets individuals who sell their business or shares pay Capital Gains Tax at a rate of 10% as opposed to the higher rates of tax which are 18% or 28%.
This is limited at a lifetime cap of £1 million.
If you are a director of a solvent company (i.e. one which has no debts that can’t be paid) and you’re looking to close the company down, the Members’ Voluntary Liquidation (MVL) process is a very tax-effective way to do. By closing your company with this (HMRC-approved) process, directors can receive huge tax savings, including the benefits form Business Asset Disposal Relief.
In order to put your company into an MVL, you will need to appoint a Licensed Insolvency Practitioner. They will guide you through the whole MVL process and help you extract the money (and any other applicable assets) from your company and distribute them to the shareholders of the company.
Clarke Bell is here to help you
The rules for both holdover relief and Business Asset Disposal Relief (Entrepreneurs’ Relief) can be tricky to understand, which is why it’s so important to get expert advice, especially in the event that you are considering closing down your business or restructuring in the next six years.
At Clarke Bell we would always recommend that you speak to your tax advisor or accountant to see whether you can benefit from either holdover relief or Business Asset Disposal Relief.
And, if you are considering closing your company, we help you close your company through the Members’ Voluntary Liquidation (MVL) process. With an MVL, most directors will be able to claim Business Asset Disposal Relief which can help to save them a lot of money due to its tax efficiencies.
To find out more, get in touch with us today.
