Holdover relief and its relevance in the current economic climate

Holdover relief is an unusual tax relief in that it does not mitigate someone from paying capital gains tax, but rather it merely defers the gain being crystallised (i.e. chargeable) by metaphorically kicking the can down the road. Through using holdover relief, the recipient of a gift receives the asset at the same base cost as that at which the donor had held the asset, typically being the acquisition costs combined with certain fees and (in the case of property) improvement expenses. When the recipient then disposes of the asset without claiming holdover relief again, the disposal will trigger a capital gains tax liability.

While many people are aware that selling an asset may trigger a liability for capital gains tax, it is vital to note that gifting an asset to a connected party, such as an immediate family member (with the exception of one’s spouse) or a business partner, such that ownership of the asset is transferred, can crystallise a capital gain. Where there are two individuals or entities that are connected, the actual amount received in exchange for the asset is irrelevant – for the purposes of calculating a capital gains tax liability, the actual market value is always used. For this reason, gifting assets or selling them at an undervalue to a connected person is not an effective means of reducing a capital gains tax liability. Instead, holdover relief is the most effective means of transferring ownership of an asset that stands at a high capital gain without paying any capital gains tax up front.

Perhaps holdover relief has never been more valuable than in the current economic climate, as high inflation often leads to the appreciation of assets, and also as many individuals feel the impact of their annual allowances being more than halved from £12,300 in 2022/23 to £6,000 in 2023/24 to £3,000 in 2024/25. With the reduction of the capital gain under which an individual is not liable to pay capital gains tax over the coming years, this will increase the tax owed on disposals where holdover relief is not claimed. By way of example, whereas the disposal of a £12,300 capital gain in 2022/23 would not trigger any capital gains tax, the same disposal in 2023/24 may trigger a liability of £1,764 on the disposal of property or £1,260 for other asset types.

While there is no limit to the number of times someone can holdover a gain, the method through which holdover relief can be claimed varies depending on the type of asset. Where the assets are used in a trading business, holdover relief can be claimed on a direct transfer from person A to person B. However, for assets that do not qualify as business assets under tax legislation, holdover relief is only available for transfers into or out of trusts. In the latter category, the trust assets can be transferred into trust, holding in the gain, and then after a holding period has passed, the assets can be appointed out to the relevant beneficiaries at a later date, with the gain held out of the trust. Following this, the beneficiaries would then hold the assets with the original base cost, such that if they were sold at a later date, then the capital gains tax liability would be triggered.

It should be noted that holdover relief is available on gifts only, and not on sales. If you are concerned about the impact of capital gains tax on the sale of an asset, you might wish to discuss this with an appropriate independent financial planner or adviser, who might be able to explore with you the availability of certain investments which can help mitigate against this.

In an environment where individuals are looking to pass on their wealth to the next generation, while limiting their tax liabilities, holdover relief can be a very useful mechanism to defer capital gains tax and will only become more beneficial when the impact of the halving of annual allowances is felt.

By Celia Gould, Trainee Solicitor