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Putting gains on hold – Tony Wickenden

I was talking last week about the “lurking impediment” to the making of lifetime gifts. That impediment is capital gains tax.

Of course, before you even consider CGT, you would only look at making disposals by outright gift, gift into a trust or into one of the acceptable insurance-based capital investments if you were happy with all the consequences of the gift, especially in respect of your retained rights or lack of them.

Especially for older tax planners, the CGT cost – or even the loss of the tax-free rebasing of asset values for CGT on death – needs to be carefully borne in mind in weighing up the benefit of making a gift.

Where giving is a desirable inheritance tax planning strategy but there are built-in capital gains, it might be worth looking at whether it is possible to use holdover relief to defer capital gains deemed to have been realised when a gift is made. Unfortunately, holdover (deferral) relief is only possible in certain fairly restricted circumstances. Even then, if the potential donor is of advanced years and the built-in gains are significant, you might question the wisdom of such a strategy.

For younger donors, holdover relief might be of inter- est. In this case, the anti-avoidance provisions introduced in last year’s Finance Act need to be considered.

Let us have a look at how the relief works and how you can claim it. From April 1980 until March 14, 1989, there was a general relief which applied to gifts of any asset. This general relief was abolished by the Finance Act 1989.

After March 13, 1989, holdover relief applies only in two sets of circumstances:

l Relief for gifts of business assets (section 165 TCGA 1992).

l Relief on gifts on which inheritance tax is chargeable (section 260 TCGA 1992).

The relief applies to individuals and trustees of certain settlements. In respect of settlements, trustees can claim holdover relief on the transfer of business assets out of any type of trust to a beneficiary.

Where a trust is a discretionary trust, the trustees can claim holdover relief in respect of any asset that is being transferred to a beneficiary. This applies to any discretionary trust, including an accumulation and maintenance trust, unless the beneficiary under an accumulation and maintenance trust had a prior interest in possession.

Holdover relief applies on a gift of a business asset. An asset is a business asset for this purpose if:

l It is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by the transferor, his personal company or a member of a trading group of which the holding company is the transferor’s personal company orl It consists of shares or securities of a trading company, or of the holding company of a trading group, where either the trading company or holding company is the transfer- or’s personal company or the shares are unquoted.

A personal company is a company where not less than 5 per cent of the voting rights are exercisable by the transferor.

Prior to April 6, 2003, a trading company was defined as a company whose business consisted wholly or mainly of carrying on a trade or trades. This was the retirement relief definition but retirement relief ended on April 5, 2003 and, with effect from April 6, 2003, the more restrictive and much criticised taper relief definition of trading company applies for holdover relief purposes.

To be a trading company for the purposes of taper relief, a business has to demonstrate that its non-business activities account for no more than 20 per cent of the company’s activities. This 20 per cent limit can be linked to a number of factors such as turnover from non-trading activities, asset value and expenses incurred by or time spent by officers or employees of the company in undertaking its activities. For this reason, the application of the rule can be quite arbitrary.

It is important that the owner of shares in a trading company who is considering making a gift of those shares to, say, an adult child or a trust, ensures that the company’s circumstances are not such that the 20 per cent rule may be breached. If the 20 per cent rule is breached, CGT may be immediately payable with no holdover possible.

While the impact of the 20 per cent rule has been relativ- ely well publicised in the context of business assets taper relief (particularly in respect of the danger of company investments to the availability of the relief), the fact that the trading company definition for taper relief also applies for holdover relief has not.

With 100 per cent busin- ess property relief available for IHT purposes, fewer lifetime transfers of shares take place and transfers on death are, in effect, exempt from CGT, with a rebasing of asset value taking place.

However, where transfers during lifetime do take place, just as when companies make investments, the impact of the 20 per cent test on the definition of trading company and the resulting reliefs must be remembered.

Agricultural property within the meaning of the inheritance tax provisions also qualifies for holdover relief.


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