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Capital Gains Tax (CGT) Holdover Relief and Trusts

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Legislative changes in recent years have meant that an increasing number of trusts are within the relevant property regime for Inheritance Tax Purposes (IHT). as such gifts into most trusts are chargeable lifetime transfers for iht and distributions from many trusts generate an IHT charge.

If the transfer is within the IHT nil rate band, there may not be any iht payable. however, it is important to be aware of the opportunity to defer any Capital Gains Tax (CGT) chargeable that arises as a consequence. technically, where a disposal made by an individual or trustees is a chargeable transfer for IHT, then CGT holdover relief is available on the gain.

What is Holdover Relief?

Holdover Relief is a deferral of CGT and it is very valuable in its own right according to the old adage that tax deferred is tax saved. However, through sensible planning there are also opportunities for direct CGT savings. For example, if Holdover Relief is obtained when assets are distributed from a trust and the beneficiaries receiving those assets later sell them within their own CGT annual exemption, then no CGT will be payable. If there are multiple beneficiaries and this process is spread over a number of years then there is potential for a substantial CGT saving.

Claim for CGT Holdover Relief

Holdover Relief is not automatically applied and is subject to a claim. There are some pitfalls to be aware of, two of which are covered briefly here.

The first point to note is that Holdover Relief is not available on an appointment of capital in the first three months after a ten year anniversary. This would otherwise be a tempting option because there is no IHT upon a capital appointment in these circumstances. It may be advisable in the first three months following a ten year anniversary to distribute an exempt asset such as cash from the trust but not assets chargeable to CGT.

A second factor to consider is that where a gain has been held over and the recipient then becomes non-resident within six years, the Revenue may claw back the tax on that gain. If the Revenue cannot recover the tax from the transferee then the trustees become liable to pay the CGT. This can cause problems if the trustees have distributed all the assets. If the trustees are concerned about such a scenario it may be advisable to hold back sufficient funds to pay the tax on any gain. The trustees should of course also consider how much CGT is at stake were they simply not to make a holdover election but to pay the CGT instead. After allowing for any capital losses that may be available this may not be as much as feared.

Claiming holdover relief on a relevant property trust

Holdover Relief is not automatically applied, but instead it must be claimed by both the trustees and the recipient and must be notified to HMRC using a form signed by both parties.  The simplest way to submit this form is to send it along with the self-assessment tax return for the trust.

It is worth noting that holdover relief will not apply if the gift is made to a non-resident individual.  Where the recipient was UK resident at the time of the gift, but becomes non-resident within six years of the end of the tax year of the gift, the tax will become immediately payable.  Where the tax cannot be reclaimed from the recipient, the onus may fall to the trustees to settle the liability.

s260 holdover relief

Holdover relief is available when an asset, such as an investment portfolio, is gifted to an individual out of a trust and there is an immediate charge to IHT as a result of the gift.  The relief is available to prevent the gift being subject to double taxation under both the IHT and CGT regimes.  If the transfer is within the IHT nil rate band, there may not be any IHT payable.  However, it may still be possible to defer any CGT that arises as a consequence.

Disposals made in the first three months after a trust’s 10-year anniversary are not subject to IHT and therefore care should be taken not to dispose of any assets which may give rise to a CGT charge in that period, as holdover relief will not be available.

Gifts of business assets

Holdover relief is also available when the asset being disposed of is a “business asset” for CGT purposes.  “Business assets” refers to buildings, plant and machinery or fixtures and fittings which are used in a business.  With respect to trusts, this can be a business asset which relates to a business being carried out by the trustees or the life tenant.

There are circumstances under which the relief can be restricted.  For example, if a building is used partly for a business and partly for another purpose (eg. a residential flat above a shop), then the amount of the deferable gain will be restricted to that which relates to the business part of the asset.

Holdover relief will also be restricted if any remuneration was received in exchange for the gift.  Where this remuneration was greater than the original cost of the asset, then the excess will be immediately chargeable.  Any further gain can be held over in the usual way.

Capital Gains Tax

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