Back to basics: Section 165 holdover relief

Chris Holmes in our London office and Paul Townson in our Birmingham office co-authored "Back to basics – Section 165 holdover relief", published by Tax Journal on 10 March 2023.

CGT holdover relief under TCGA 1992 s 165 is a valuable relief for gifts of business assets and certain other assets. The relief aims to prevent tax from being a hurdle to the succession of acceptable assets by ensuring that a dry tax charge does not arise on a gift. There are various conditions regarding the nature of the asset, the donor and the donee. Relief may be restricted or denied where conditions are not met. For the donor, an election results in the chargeable gain being reduced by the held over again; for the donee, the base cost is reduced by the quantum of the gain held over. A joint election by the donor and donee is required, except for settlements into trust where only the settlor need sign.

The article includes sections on:

• The purpose of gift reliefs
• How s 165 holdover relief works
• Conditions for relief
• Restrictions to the relief
• Partnership incorporations
• Intangible fixed assets
• Donee liability
• Making the claim
   

Relief under TCGA 1992 s 165 is one of a small number of ‘holdover reliefs' (or 'gift reliefs') available when certain chargeable assets are gifted wholly or partly to another person. Gift relief generally seeks to prevent tax from being a hurdle to the succession of acceptable assets by preventing a dry CGT charge arising on the gift.

Gift relief has been largely unchanged for more than 30 years and is available for:

• Business assets, including shares and securities in certain trading companies (under s 165);
• Qualifying furnished holiday lettings properties (under s 165, as extended by ss 241 and 241A);
• Agricultural property that is not used in a business (under s 165(5)); and
• Gifts immediately chargeable to IHT (under TCGA 1992 s 260).
   

This article specifically considered business asset holdover relief under s 165 ('s 165 holdover'). In practice, we mainly see s 165 holdover used:

• Where a sole trade, an interest in a trading or professional partnership, or shares in a trading company are gifted to other family members or to certain family trusts; or
• On incorporation of a sole trade or partnership as an alternative to incorporation relief, i.e. a gift or sale at undervalue to a company that the donor owns, so they personally lose no value.
   

Where conditions for both s 260 and s 165 have been met, s 260 has priority. Hence, most gifts involving trusts are not within s 165, unless the trust is a qualifying interest in possession trust.

We often receive queries involving purported gifts where there is apparently no family connection. As tax professionals, we should be sceptical about such cases and seek to understand the true reason behind a person giving away an asset. Invariably, we find that a gift is made as a 'thank you' for something, which usually means that it is actually a disposal for consideration by the donor, and invariably income for the recipient (for example, a gift to a 'friend' who happens also to be a consultant who has helped with something).

Consequently, one of the few instances where we see s 165 applying outside of family gifts and incorporation scenarios is where a major shareholder might choose, for wholly commercial reasons, to gift a small number of shares to an employee as an incentive. In such cases, the employee is still likely to be taxed on receipt of the gift as an employment-related security, but a joint s 165 claim is still required to hold over gains, as the disposal will be deemed to have taken place at market value.

Section 165 holdover is a valuable, long-standing relief for transferring businesses either on incorporations or for succession. However, it can have its complexities, especially around shares, and careful consideration of the facts is always recommended before a gift is made.

For further information, or for assistance, please contact Chris Holmes or Paul Townson.