How does hold-over relief work for gifts of shares in the UK?

Full answer

Hold-over relief is a CGT deferral mechanism that applies when assets are gifted or transferred at undervalue. Instead of the donor paying CGT on the deemed disposal at market value, the gain is "held over" and crystallises in the hands of the recipient when they dispose of the asset. Section 165 hold-over relief (business assets) Available for: -- Assets used in the donor's or a personal company's trade (plant, machinery, goodwill, land and buildings used for business) -- Shares in unquoted trading companies (including AIM shares that qualify as unquoted for this purpose) or personal trading companies (where the donor holds at least 5%) -- Agricultural property that would qualify for Agricultural Property Relief for IHT Not available for: -- Investment property (unless qualifying as furnished holiday lets under transitional rules) -- Listed shares (other than where the company qualifies as a personal company) -- Shares in investment companies Mechanism 1. Donor makes a gift of shares with market value GBP 500,000 and original cost GBP 100,000 (gain = GBP 400,000) 2. S165 election is made jointly by donor and recipient 3. Donor: no CGT payable on the gift 4. Recipient: acquisition cost = market value (GBP 500,000) less held-over gain (GBP 400,000) = GBP 100,000 5. Recipient sells for GBP 600,000 in a future year: gain = GBP 600,000 - GBP 100,000 = GBP 500,000 (including the GBP 400,000 held-over gain) Section 260 hold-over relief (chargeable transfers) S260 hold-over applies to gifts that are chargeable transfers for IHT purposes (typically gifts into trusts that are Chargeable Lifetime Transfers) and to gifts where holdover under S165 is not available. It operates similarly to S165 in terms of mechanism but is broader in asset scope -- it applies to any asset disposed of as a chargeable transfer or as an exempt transfer to a disabled trust. Hold-over and Gifts to trusts post-2006 Gifts into most trusts are CLTs for IHT, so S260 hold-over is available even if S165 is not. This makes trusts a useful planning vehicle for passing business assets where the assets do not independently qualify under S165. Joint election Both the donor and the recipient must sign the hold-over election (HMRC form HS295 or a letter) within 4 years of the end of the tax year of disposal.

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