Mitigating Capital Gains Tax using Holdover Relief
If you run a family business, you wish to pass the assets now to the next generation. How can you do this and mitigate any capital gains tax?
Holdover relief is a useful tool used in Succession Planning for companies that wish to pass on business assets to the next generation without an immediate capital gains tax charge. At typical example of succession planning we deal with on a regular basis is: Mr. Banks age 68 the founding shareholder of Widgets Limited wishes to transfer his shares to his son Alan.
Regardless if the shares are given for no value or below market value, HMRC will deem Mr. Banks has disposed of the asset for its market value and capital gains tax is potentially due on the disposal.
Solution - Passing Private Limited Company Shares to the Next Generation.
However, immediate charges to capital gains tax maybe reduced or eliminated by means of reliefs. Holdover relief applies to assets in the business, goodwill and shares in private limited companies. Holdover relief postpones the gain for the ‘donor’ (Mr. Banks) and passes the gain to the ‘donee’ (his son Alan). How does it work? Within two years of the gift being made the donor and the donee must jointly elect to ‘holdover’ any gain arising.
When (or if) Alan disposes of the business assets, capital gains maybe chargeable on gains arising in both the period of previous ownership by his father Mr. Banks and the period of current ownership by Alan.
If the business succession plan is based on Alan passing his shares onto the next generation and there are no plans to sell shareholdings – holdover relief is particularly useful as when Mr. Banks dies any capital gains liability will be effectively extinguished. We multi-generational succession planning the business can eliminate any capital gains tax by passing the business assets to the next generation.
Holdover relief may apply to the gift of business assets into trust. Potentially deferring capital gains tax until the beneficiary eventually disposes of the asset.
Holdover Relief - Key Points
Disposals that qualify for Hold-over Relief
- Gifts of business assets
- Gifts of unlisted shares in trading companies etc.
- Gifts of agricultural land
- Gifts which are chargeable transfers for inheritance tax (IHT) purposes
- Certain types of gifts which are specifically exempted from IHT
How to Claim Holdover Relief?
Relief is claimed by submitting HMRC Form HS295.