Individuals have a number of reliefs from Capital Gains Tax. Some of the reliefs include Roll-Over relief, Incorporation Relief, Gift Relief and Entrepreneurs relief. The different reliefs have different conditions that need to be met attached to them so you will need to look at these first in order to determine if you are entitled to any of the above mentioned reliefs. The different reliefs also have different implications to your liability and a brief description of each of the reliefs is given below:
- Roll Over Relief – defers tax on chargeable gains when a person disposes of a qualifying business asset and buys another.
- Incorporation Relief – Applies when an individual transfers their business as a going concern to a company. Like rollover relief, the aim is to defer CGT arising.
- Gift relief – A wide ranging relief will allows claimants to defer any capital gains tax due.
- Entrepreneurs Relief – is a relief that is open to directors who own 5pc or more of a company, and which allows them to enjoy a 10pc tax rate on capital gains up to a lifetime limit. This compares with the 28pc rate of tax payable without the relief.
In this article, we look at Roll over relief. If you need more information on the other reliefs mentioned, click on the relevant links.
Gift Relief – What is it?
Gift Relief is one of the more common reliefs which individuals tend to claim. This is because Gift relief is very wide reaching and it can be claimed for a wide array of things. In short, there are two types of gift relief, Hold-Over Reliefs (which require a claim) and Automatic Reliefs.
Hold-over relief may be claimed for:
- gifts of business assets
- gifts of unlisted shares in trading companies
- gifts which are chargeable transfers for IHT purposes
- certain types of gifts which are specifically exempted from IHT
- gifts of agricultural land
Relief is due automatically on:
- gifts to charities, community sports clubs and certain other bodies
- sales of works of art to certain bodies
- gifts (in the strict sense) of works of art where certain undertakings have been given
In this article, we concentrate on gift reliefs in relation to gifts of assets and gifts or unlisted shares in trading companies.
Gift relief on business assets and unlisted shares – How it works
Gift relief in relation to unlisted shares or business assets essentially holds over the tax due until the recipient disposes of the gift. If the asset increases in value, when the recipient disposes of it, they will have two parts of CG to pay.
There are a number of conditions that need to be met in order to claim this relief. The conditions are:
- a gift by an individual or trustees
- of a business asset (used in a trade carried on by the transferor, or their personal company or a member of a trading group of which the holding company is their personal company. If the asset was used partly for business and partly for private, it needs to be apportioned to take advantage of this).
- to a UK resident (If the person receiving the held over asset emigrates within 6 years after the year of assessment in which the gift was made, the hold-over relief is clawed back. They become liable to tax immediately before they emigrate on a gain equal to the amount of gift relief given to the transferor. If the emigrating person doesn’t pay their tax back within 12 month, the transferor can be charged)
- a valid claim is made (the claim needs to have signatures of the transferor and transferee, have details of the assets involved in the transfer, be within the time limit which is 4 years from the end of the relevant tax year and must be made on the form IR295).
How Gift Relief is calculated on Business Assets
How you calculate the relief due depends on whether the gift is either
- an outright gift (where no consideration given, or consideration given doesn’t exceed relevant allowable expenditure under).
- a partial gift (where consideration exceeds relevant allowable expenditure but is still less than MV of the asset at date of disposal).
If it is an outright gift, the whole gain is held over.
For example: A father gifts his son an asset which initially cost him £100,000 and has a current market value of £250,000. The son in essence pays £0 for the asset. Thus, the calculation is as follows:
Step 1 : Gain before Relief = Market Value £250,000 – Acquisition cost £100,000 = £150,000
Step 2: As consideration of £0 is less than the allowable expenditure, the whole gain of £150,000 is held over. So
Gain before Relief £150,000 – Gain Held over £150,000 = £0 Capital Gains Tax payable.
Step 3: The revised acquisition cost for the son
Deemed Acquisition cost £250,000 – £150,000 Held over gain = £100,000 revised acquisition cost.
If it is a partial gain on the other hand, the relief due is restricted. The calculation will be as follows;
A father sells his daughter a property which cost £100,000. The daughter paid £150,000 and the current market value is £2500,000.
This is a partial gift as the consideration of £100,000 is greater than the cost of £100,000. Thus the calculation is as follows:
Step1: Gain before relief = £300,000 market value – £250,000 consideration = £100,000 Gain
Step 2: Chargeable Gain = Consideration £150,000 – £100,000 cost = £50,000 CG
Step 3: Hold Over gain = £100,000 gain – £50,000 Cg = £50,000 Held over gain
Step 4: Revised Acquisition cost = £300,000 Market Value – £50,000 Held over = £250,000.
How Gift Relief is calculated on Shares.
Gift relief is available for shares of unlisted companies or shares of trading companies or holding companies that is the transferor’s personal company. A company is the transferor’s personal company if they can exercise at least 5% of the voting rights in it AND they are an employee/officer of the company.
Let’s look at an example to see how the relief on shares works. Say a father gifts shares to his son in a company. The shares had cost the father £10,000 and they had a current market value of £60,000. Also the company had total chargeable assets of £1,200,000 and total assets of £200,000.
Step 1: Calculate the gain of the shares gifted = £60,000 – £10,000 = £50,000
Step 2: Gain eligible for relief= £50,000 gain * ( £1,200,000 CBA value / £2,000,000 total assets) = £30,000 Relief
Step 3: Chargeable Gain = £50,000 gain – £30,000 relief = £20,000 Chargeable Gain