HMRC are sending one-to-many โnudgeโ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it โ without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred.
What is gift hold-over relief?
Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by โholding overโ the gain, reducing the transfereeโs base cost by the amount of the held-over gain. The relief is often used to aid succession planning.
Eligible gifts
The relief is available for:
- gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individualโs personal company or by a member of a trading group where the holding company is the individualโs personal company;
- gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%);
- gifts of land deemed to be agricultural land for inheritance tax purposes;
- assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and
- certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors.
Mechanics of the relief
As a gift by its very nature is not made at armโs length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transfereeโs base cost is the market value as reduced by the held-over gain.
Example
Bill gives his son James his workshop, which cost ยฃ50,000. At the time of the gift, the market value was ยฃ140,000. The gain is ยฃ90,000, which Bill and James agree to hold over. Jamesโ base cost is ยฃ50,000 โ the market value of ยฃ140,000 less the held-over gain of ยฃ90,000.
If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over.
Example
Elizabeth sells her studio to her daughter Dawn for ยฃ40,000. It cost her ยฃ30,000 and has a market value of ยฃ75,000. They claim hold-over relief. The ยฃ10,000 difference between the proceeds (ยฃ40,000) and the original cost (ยฃ30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of ยฃ35,000 is held over. Dawnโs base cost is ยฃ40,000 (ยฃ75,000 โ ยฃ35,000).
Joint claim
The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties.
Dealing with the letter
If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim.
Partner note: TCGA 1992, s. 165; for claim form see www.gov.uk/government/publications/relief-for-gifts-and-similar-transactions-hs295-self-assessment-helpsheet.
For Helpย with Topic above or any Accountancy help โ contact us:ย