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Deferring capital gains tax on a business asset

Deferring capital gains tax on a business asset 

The potential to be charged capital gains tax (CGT) arises with the sale or gift of an asset.

Deferral of the charge is possible with reference to business assets using 'hold-over' relief, thereby avoiding an immediate CGT charge for the donor. The donee takes over the donor’s CGT base cost, increasing any gain on the eventual sale. The relief is commonly used in the transfer of a business to a company because it allows the debtors and creditors to be retained by the sole trader outside of the company; the company can therefore commence with no leftover debtors or creditors. The relief also permits the sole trader or partnership to retain assets used in the business and in their name, which may be an important consideration if a mortgaged property is being transferred.

'Hold-over' relief is relevant to 'business assets' used by a trading business, profession or vocation and not in a non-trading company (i.e., an investment company). The donor must have carried on the business either individually or in partnership, via a personal company (holding at least 5% of the voting rights but not necessarily 5% of the number of shares) or as a member of a trading group whose holding company is the donor's personal company. As such, business assets can include shares listed on the alternative investment market. Note that the recipient cannot be a company where the business assets comprise shares in a trading company.

The general rule for CGT is that gifts are treated as being made at market value. Should the transfer be made for nil consideration or less than the asset's value at the date of transfer then the disposal is deemed to be ‘otherwise than by way of a bargain made at arm’s length’ and potentially chargeable to CGT (subject to allowable losses). Under a 'hold-over' claim, the CGT charge is on the excess of the value received with only the balance being held over which can cause problems if no cash is accepted on transfer.

As with many tax reliefs, there are conditions, one of which is that the asset must have been used in the trade throughout its period of ownership by the donor. Should the asset not have been so used throughout, the restriction is determined by calculating the number of days the asset has not been used for business purposes. Similarly, where an asset has been used partly for business and partly not (e.g., business premises including a shop with a flat above), a just and reasonable restriction must be made to the held-over gain. The final condition is specific to gifts of trading company shares where the company's assets include non-business assets (invariably investment assets). In this situation, the held-over gain is restricted by the fraction A/B, where A is the value of chargeable business assets and B is the value of all chargeable assets. For example, a gift of shares creates a  gain of £200,000; the company has trading premises worth £3 million and an investment property worth £1 million. The amount of held-over gain is restricted to the ratio of chargeable business assets to total chargeable assets by multiplying the gain by the fraction 3/4, i.e., £150,000 can be held over and £50,000 is chargeable.

Practical tips:

If it were possible to liquidate the 'non-business' assets (e.g., if they were listed investments) before making the gift, this would maximise the relief available. Hold-over relief is not automatic and must be claimed  within four years of the end of the tax year of the gift.