Gift Hold-Over Relief: Passing On Business Assets Without a CGT Bill

What Hold-Over Relief Actually Does

When you give away — or sell at undervalue — a qualifying business asset, the capital gain you would otherwise be charged on is "held over". In plain terms, the gain isn't taxed now. Instead it is deferred and effectively passed on with the asset. The person receiving the gift takes the asset over at your original base cost (your cost minus the held-over gain), rather than at its current market value.

The Capital Gains Tax isn't cancelled — it's postponed. The recipient inherits a lower base cost, so when they eventually dispose of the asset, their gain will be larger because it includes the gain you held over plus any further growth in value while they owned it. The tax point simply moves down the chain to the next disposal.

This is what makes hold-over relief so useful for succession. A trade business owner who wants to pass the business to the next generation while still alive can do so without triggering an immediate CGT charge they'd otherwise have to fund out of their own pocket — even though they received nothing for the gift.

The Two Routes: s165 and s260 TCGA 1992

Hold-over relief lives in the Taxation of Chargeable Gains Act 1992. There are two separate provisions, and they cover different situations. It matters which one applies to you because the conditions — and crucially, who has to make the claim — are not the same.

Section 165 — Gifts of Business Assets

This is the route most trade business owners use. Section 165 applies to gifts (or sales at undervalue) of qualifying business assets — broadly, assets used in your trade, or shares in your personal trading company, or shares in an unlisted trading company. It's the mechanism for passing on the premises you trade from, plant and machinery used in the business, or the shares in your limited company.

Under s165 the relief is claimed jointly. Both the person making the gift (the donor) and the person receiving it (the donee) must sign the election. That joint requirement is the key practical difference from the other route.

Section 260 — Gifts Chargeable to Inheritance Tax

Section 260 applies where the gift is a chargeable transfer for Inheritance Tax purposes — most commonly gifts into or out of certain trusts (for example, gifts into a discretionary trust). The asset doesn't have to be a business asset for s260 to apply; what matters is that the transfer is immediately chargeable to IHT.

A significant difference: under s260 the donor can claim hold-over relief on their own — a joint election with the trustees is not required in the same way. Where both s165 and s260 could in principle apply, s260 takes priority.

Which Assets Qualify Under s165

Not everything you own qualifies. For the business-asset route, the gain must relate to a qualifying business asset. The main categories are:

• Assets used in your trade: assets used in a trade, profession or vocation carried on by you (as a sole trader or partner) — for example your trade premises, workshop, yard or business equipment.
• Assets used by your personal company: assets used in the trade of a company that is your "personal company" — broadly a trading company in which you hold at least 5% of the voting rights.
• Shares in an unquoted trading company: shares or securities in a trading company (or holding company of a trading group) that is not listed on a recognised stock exchange.
• Shares in your personal trading company: shares in your personal trading company even if it is listed, where the 5% personal-company test is met.

The word "trading" matters. A company holding significant investment assets — for example a property-letting business held as investment rather than trade — may fail the test, or only attract partial relief. Cash and investments held beyond the reasonable needs of the trade can restrict the relief on a share gift.

The Claim and the Election

Hold-over relief is not automatic. You have to claim it, and the claim has time limits. Under s165, the relief is claimed jointly by the donor and the donee — both parties sign the election and submit it to HMRC. HMRC provides a standard helpsheet and claim form for this purpose, and the claim must generally be made within four years of the end of the tax year in which the disposal took place.

Because the donee's future tax bill increases (they take the lower base cost), they need to understand and agree to what they're signing up to — hence the joint requirement for business assets. Under s260, the rules differ and the donor can typically claim without the recipient's joint signature, reflecting that the relief there is tied to an IHT-chargeable transfer rather than a business-asset gift.

How the Gain Is Calculated and the Base-Cost Reduction

The starting point is the deemed disposal at market value. You work out the gain as if you had sold the asset for its current market value, less your original acquisition cost and any allowable costs of improvement and disposal. That figure is the gain that would normally be chargeable.

Where a full gift is made for no consideration, the whole of that gain can be held over. The donor pays no CGT on it now. The donee's acquisition cost (their base cost going forward) is the market value at the date of the gift minus the held-over gain — which usually leaves them with the donor's original cost. When the donee later sells, their gain picks up the held-over amount plus any growth since the gift.

A restriction applies where actual consideration is paid that exceeds the donor's base cost — for example a sale at undervalue rather than an outright gift. In that case the excess of the proceeds over the donor's allowable cost is chargeable on the donor immediately and cannot be held over; only the remaining gain is deferred. There is also a restriction where the asset has had non-business use, or where only part of a building was used for the trade — the relief is reduced to the proportion attributable to qualifying business use.

Worked Example: Gifting Business Premises

Say you bought the premises your trade business operates from for £150,000 some years ago. It's now worth £250,000. You want to gift it to your daughter, who is taking over the business. The asset has been used wholly in the trade throughout.

• Market value at gift: £250,000
• Your original cost: £150,000
• Gain on deemed disposal: £100,000

Without relief, you'd face a CGT charge on that £100,000 gain even though you received nothing. With a joint s165 hold-over election, the £100,000 gain is held over. You pay no CGT now. Your daughter takes the premises at a base cost of £250,000 minus the £100,000 held over, which is £150,000 — your original cost.

If your daughter later sells the premises for, say, £300,000, her gain is £300,000 minus her £150,000 base cost = £150,000. That captures the £100,000 you held over plus the £50,000 of growth during her ownership. The tax wasn't avoided — it followed the asset down to the next disposal.

Now vary it: suppose instead of an outright gift, your daughter pays you £180,000 (a sale at undervalue). Because the £180,000 paid exceeds your £150,000 base cost by £30,000, that £30,000 is chargeable on you now and cannot be held over. Only the remaining £70,000 of the gain is deferred. Sales at undervalue do not get the same clean result as a pure gift.

Interaction With Business Asset Disposal Relief

Business Asset Disposal Relief (the relief formerly known as Entrepreneurs' Relief) reduces the CGT rate on qualifying business disposals. It and hold-over relief solve different problems. Hold-over relief defers the whole gain to a later disposal; Business Asset Disposal Relief reduces the rate of tax on a gain that is being charged now.

For succession planning this creates a choice. If you hold over the gain, you pay nothing now but the recipient takes a lower base cost and a potentially larger future bill — and Business Asset Disposal Relief is used up on your part of the gain if you don't crystallise it. In some cases it can be better to crystallise the gain now and claim Business Asset Disposal Relief at the reduced rate, especially where your lifetime allowance for that relief is available and the rate is favourable. The right answer depends on the numbers and the family's plans, and is a point to take professional advice on.

Interaction With IHT and Business Property Relief

A lifetime gift of business assets has Inheritance Tax consequences as well as CGT ones. An outright gift to an individual is usually a potentially exempt transfer — it falls out of your estate entirely if you survive seven years. Business Property Relief can also reduce or eliminate the IHT value of qualifying business assets, in many cases at 100% for an unquoted trading business or its shares.

The two reliefs work on different taxes but point in the same direction for genuine trading businesses: hold-over relief manages the CGT on the lifetime gift, while Business Property Relief manages the IHT exposure. Where the gift is into a trust and immediately chargeable to IHT, the s260 route to hold-over relief comes into play instead of s165. Getting CGT, IHT and the choice of route to line up is exactly the kind of planning that pays for itself in advice.

When Hold-Over Relief Is Useful

The clearest use case is succession: passing a trade or a trading company to children or other family members during your lifetime. It lets you transfer ownership and control while you're still around to hand over relationships, suppliers and know-how, without a CGT bill landing on a transaction that produced no cash to pay it.

• Handing the business to the next generation: gifting trade premises or company shares to a son or daughter taking over the business.
• Bringing family into the company: transferring shares in an unquoted trading company to family members joining the business.
• Gifts into trust for the family: moving assets into a trust as part of estate planning, where the s260 route applies because the transfer is chargeable to IHT.
• Restructuring before a later sale: moving assets within a family group ahead of an eventual third-party disposal.

Quick Reference: s165 vs s260 Hold-Over Relief

Hold-over relief is powerful but the conditions, restrictions and interactions with other reliefs are detailed, and the wrong route or a missed election can be costly. The figures here are illustrative — always take professional tax advice before gifting business assets, and check the current HMRC guidance, because rates, allowances and the rules around qualifying assets change.