Changes to holdover relief on capital gains tax

Ralph P Ray examines the restrictions on holdover relief for gifts following the Finance Act 1989.
Priorto 1978, when undertaking capital tax planning, the main bugbear was normally capital gains tax, and not the then capital transfer tax, because a gift constituted a deemed disposal for capital gains tax purposes and the tax had to be found, often where the liquid resources were not available.
The first alleviating provisions came in s.46 of and sched 8 to the Finance Act (FA) 1978 (reproduced in s.126 of and sched 4 to the Capital Gains Tax Act 1979 (CGTA)). Gifts of shares in a family trading company could be held over so that the transferee merely stood in the shoes of the transferor and capital gains tax only became payable if the transfere made an arm's length disposal (other than on death). The transferor had to be an individual and the transferee a person (ie, an individual or a company) resident or ordinarily resident in the UK. When the transferee made an arm's length disposal, the gain was calculated at the base value of the transferor subject nowadays to indexation and rebasing relief.
By s.79 of the FA 1980 this capital gains tax gift relief was extended to all cases where one individual made a disposal, other than a bargain at arm's length to another individual, resident or ordinarily resident in the UK, whether or not in relation to business assets. S.82 of the FA 1982 extended holdover relief to cases where trustees made a capital gains tax disposal to beneficiaries or the trustees of a new settlement.
Pt VII of sched 17 to the FA 1989 has repealed s.79 of the FA 980 and s.82 of the FA 1982 for disposals on or after 14 March 1989. Accordingly the 1978 provisions have been broadly restored by s.124 of and sched 14 to the FA 1989. S.125 of the CGTA (as amended) becomes the principal relieving section for gifts of business and agricultural assets. S.147 of the CGTA (as amended) extends the relief in defined non-business areas particularly for non-PETs gifts ([ie], gifts on which inheritance tax is chargeable).
The reason for restricting the holdover relief in the FA 1989 was set out in the Inland Revenue press release of 14 March 1989:
'One of the original reasons for introducing this deferral was the existence of a simultaneous charge to capital transfer tax. With no general inheritance tax charge on lifetime giving, that rationale no longer applied. In addition, the capital gains tax deferral has come to be widely used not just to postpone gains but to reduce or eliminate the tax charge on gains up to the date of gift. The reform, by substantially restricting the scope of the deferral, will make it much more difficult to use the relief for tax planning.'
Holdover relief available
The types of gift on which holdover relief continues to be available are:
Business assets
Business assets include:
(a) assets used in the trade, profession or vocation carried on by:
-- the donor;
-- where the donor is an individual: by his family company or a member of a trading group of which the holding company is his family company (the definitions here are the same as for retirement relief under ss.69 and 70 of and sched 20 to the FA 1985); or
-- where the donor is a trustee, by the trustee or by a beneficiary who has an interest in possession in the settled property (sched 14 para 3(3) FA 1989).
Holdover relief is restricted if the asset was either not used in the trade throughout the period of ownership or if it is a building only part of which was used in the trade. All agricultural property is excepted from this restriction, whether owner occupied or let, for which IHT agricultural relief is available; in the main this applied to farmland and associated buildings.
(b) IHT agricultural property.
(c) shares and securities in trading companies or holding companies in trading groups (defined as for retirement relief) where:
-- the shares or securities are neither quoted on a recognised stock exchange nor dealt in on the Unlisted Securities Market;
-- if the donor is an individual, where the company concerned (including a quoted or USM company) is his family company defined for retirement relief particularly para 1 of sched 20 to FA 1985 (ie, more than 50% of the voting rights are held by the donor or de fined members of his family and at least 5% by the donor; or the donor has at least 25% of the voting rights); or
-- if the donor is a trustee, where the trustee can exercise 25% or more of the voting rights.
Holdover relief is restricted if the trading company or trading group has assets not used in the trade but this restriction will not apply if, for 12 months before the gift, the donor had less than 25% of the voting rights in the trading company or holding company of the trading group.
Immediate IHT charge
Holdover relief continues where a gift constitutes a transfer immediately chargeable to inheritance tax. The most common examples are gifts into discretionary trusts. However, holdover relief will not be available if the gift is a PET which fails (ie, one on which inheritance tax becomes chargable). It is anomalous that if a PET fails and becomes chargeable, there are no capital gains tax holdover relief set-off provisions. This is subject to the holdover relief availability mentioned under the business assets heading.
A gift will be regarded as chargeable to inheritance tax even if it falls within the nil rate band, or the annual exemptions in s.19 of the IHTA 1984.
It is the current Revenue practice that in the case of trustees of a discretionary trust making appointments/advancements treated as CGT disposals, holdover relief is available because an 'exit charge' under s.65 of IHTA is itself treated as a transfer of value. This is by virtue of s.2(3) of the IHTA which provides that 'references . . . to chargeable transfers shall be construed as including references to (exit charges)'.
When a beneficiary of other trust becomes absolutely entitled, holdover relief will only apply if the assets are business or agricultural assets or certain accumulation and maintenance trusts.
Accumulation and maintenance trusts
A beneficiary may become absolutely entitled to trust assets held on accumulation and maintenance trusts pursuant to s.71(4) of the IHTA 1984. Unfortunately this is of limited use because most modern flexible type accumulation and maintenance trusts only provide for the beneficiary to become entitled to income at the specified age, not capital; capital entitledment remains in the trustees; discretion. Moreover, under existing accumulation and maintenance trusts, beneficiaries may already have taken an interest in possession.
Heritage property and maintenance funds
The reliefs provided by s.147 of the CGTA for certain disposals of works of art, historic buildings, land of scenic, historic or scientific interest, etc, continue unaltered. The reliefs provided by s.147(1) and (3) are confined to outright gifts (including gifts in settlement): in cases where some consideration (less than market value) is received, holdover relief continues for disposals which attract exemption from inheritance tax.
In addition, holdover relief continues for gifts to heritage maintenance funds which attract exemption from inheritance tax.
Political parties
Gifts to political parties and to trusts for political parties continue to attract holdover relief if they would be exempt from inheritance tax under s.24 of the IHTA 1984.
Paying CGT
Where holdover relief is not available, any capital gains tax may be paid by annual instalments over ten years if the gift is of land, or a controlling shareholding in a company, or minority holdings of shares or securities in a company neither quoted on a recognised stock exchange nor dealt in on the Unlisted Securities Market. Interest will run from the normal date ie, instalments are not interest-free and so this relief is of little, if any, value in practice.
If the gift is to a connected person and the asset is subsequently sold within the ten-year instalment period, any outstanding tax and accrued interest will become payable immediately.
Residency requirement
As previously, holdover relief is only available where UK residency applies. Moreover the anti-avoidance provisions as to emigration of the donee and gains of non-resident settlements set out in ss.79 to 88 of the FA 1981, continue in force.
Foreign-controlled companies
Holdover relief is denied to arrangements designed to take business assets outside the capital gains tax charge particularly if business assets are transferred to a UK company where the shares are owned by a non-resident trust.
Appointment, advance or disposal?
Following the s.124 and sched 14 restrictions on CGT holdover relief, in many cases it will become important to show that a particular appointment or advancement does not constitute a CGT disposal.
A CGT disposal is not normally involved where:
(a) the appointments are made on revocable trusts;
(b) the appointments are not exhaustive ie, the original trust deed is not buried as to dispositive (not merely mechanical or administrative powers eg, as to ss.31 and 32 of the Trustee Act 1925 powers maintenance and advancement (see Hoare Trustees v Gardner [1978] STC 89; Roome v Edwards [1981] STC 96; Bond v Pickford [1983] STC 517 and Inland Revenue statements of practice 9/81, 23 September 1981 and 7/84, 11 October 1984).
Methods that can be used to emphasise the absence of a disposal for CGT include:
-- leaving dispositive powers in the parent trust.
-- the appointment or advancement used is a narrow not wide power (therefore in drafting a trust keep narrow and wide powers separated not amalgamated).
-- make the appointment or advancement revocable.
Contrast other circumstances where an exhaustive advancement is required, eh, to create an interest in possession out of an accumulation and maintenance trust under s.100 of the FA 1988 so the lowest, 25%, CGT rate can apply.
If an appointment or advancement to non-resident trustees does not constitute a disposal on this analysis, and the non-resident trustees make a subsequent chargeable CGT disposal, the UK resident trustees of the remaining UK fund can become liable for the capital gains tax (see Roome v Edwards).
Double taxation arrangements
Holdover relief is not available if the gift is to a person neither resident nor ordinarily resident in the UK. Some donees may be resident for tax purposes in both the UK and another country: a double taxation agreement may exempt some of their assets from the normal UK charge on capital gains. In situations where holdover relief would otherwise continue, it is no longer available if the gift is of an asset which would be 'prescribed' in the hands of the donee. (A rule of this kind already exists if the donee is a dual resident trust.) S.126A only applied to individuals and companies: as regards trusts see s.58 of the FA 1986 as amended by sched 14 para 6(5).
Holdover elections
To take advantage of the available CGT holdover relief, it is necessary under sched 14 para 1(2) (inserting s.126(1) of the CGTA as amended) to claim the relief. The general position is that neither the present nor precursory CGT rules make provision for any special form on which an election should be made. Accordingly any clear indication that the relief is to be claimed will suffice.
No specific time limit is stated therefore a period of six years from the disposal applies (s.43 of the Taxes Management Act 1970).
A suggested wording and formats are set out in four precedents, below, to cover in particular the circumstances of gifts between individuals and into and out of trusts.
The overall reason for a claim procedure is that it may not always be beneficial to claim the holdover relief from the taxpayer's point of view, for instance, a donor may have loss or retirement relief available.
Partial claims
When a taxpayer has a holding of quoted or unquoted shares which form a 1982 or post-1982 pool, that pool is for CGT purposes a single asset (pts II and III of sched 19 to the FA 1985).
If the taxpayer gifts shares comprising the whole or part of such a pool, can a holdover election under the former s.79 of the FA 1980, or the current s.124 of and shed 14 to the FA 1989, be made for some of the shares included in the gift but not for others?
The Revenue's current views are that, if there is a single gift comprising a number of the shares, one must either elect or not elect for the entire gift. It is generally considered that their views are correct and indeed would seem to apply to any single gift where, because of its nature of specific legislation, only one asset is the subject of the gift. For example, a gift of a house or an area of freehold land.
In certain circumstances it may be possible to contend that what appears at first sight to be a single gift is in fact a number of separate gifts; for example, where a father by deed of gift gave shares from a pool equally between three children and in the dsy, __fdeed of gift there were words of severance. However, it is thought that it would be imprudent to rely upon this when as stated hereafter a simpler solution is likely to be to hand.
In practice it should be possible to overcome this problem quite simply by making a number of separate gifts (a suggestion made to the writer by Bernard Rose of Westbury Schotness & Co, chartered accountants).
Thus on, say, day one the donor would make a gift of such a number of the shares as needed to mop up the unutilised annual exemption under s.5 of the CGTA 1979 (and whatever else may ned to be covered) making no holdover election for that gift. A few days later if the donor still felt so inclined, he could make a further separate gift of a number of shares and make a holdover election for that gift. It is not considered that the Ramsay doctrine could be applied because it is not a preordained transaction: the donor is under no obligation to make any further gift after the first one and indeed a change of mind or intention or a 'brainstorm' or even death could intervene. Moreover, there would be no valuation advantage obtained by the taxpayer for CGT purposes if the separate gifts were made to a connected party as defined for CGT purposes. This takes account of the provisions of s.71 of the FA 185 -- the donor based antiavoidance provisions relating to assets disposed of in a series of transactions to a connected party. In certain circumstances disposals by a number of separate gifts may produce an advantage for inheritance tax, having regard to the loss to the disponor principle, eg, on unquoted shareholdings where related property valuations provisions apply for each separate gift.
Inheritance tax
The inheritance tax implications of holdover claims would have to be considered; for example, as to using up the nil rate band, p articularly if there are different donees it would have to be investigated which of them would get the advantage of being first or second etc.
Precedent 1
Where a disposal takes place between individuals, not including trustees, under s.126(1) of the CGTA as amended. Both donor and donee must sign the claim.
CGT holdover claim pursuant to s.124 of and sched 14 to the FA 1989 amending ss.126 and 147 of and sched 4 to CGTA 1979 (available relief for gifts between individuals -- not trustees).
To: HM Inspector of Taxes
(Address)
(Taxpayer/donor's reference number)
Dear Sir,
Re: Transfer dated [ 19 ], by way of gift of [shares of £1 each fully paid in the capital of [ Limited] from [donor] to [donee]. Claim pursuant to s.126(1) of the Capital Gains Tax Act 1979 as amended and Finance Act 1989 s.124 and sched 14 (hereinafter together referred to as 'the statutory provisions').
We the undersigned being the transferor and the transferee respectively to the above recited [share transfer] (a certified true copy thereof being attached hereto) hereby give you notice that in pursuance of the statutory provisions we claim relief for capital gains tax purposes in respect of any chargeable gain which apart from the statutory provisions would accrue to me as transferor on the disposal.
The gift constitutes [here describe it eg, business, agricultural assets or trading company's shares or gifts into a discretionary trust]. Accordingly the claim for holdover relief is covered by the statutory provisions particularly (but without prejudice to the generality of the foregoing ........).
Please return the attached copy of this notice of claim duly acknowledged by you. Dated, this dayof 19
Signed......................
(transferor)
Signed......................
(transferee)
We acknowledge receipt of the above recited notice under the statutory provisions referred to.
Dated 19
Signed......................
HM Inspector of Taxes
Note
The form of acknowledgement is purely for record purposes and is not a statutory requirement.
Precedent 2
Where an individual gifts into trust pursuant to sched 14 para 1(2) inserting s.126(1) of the CGTA (as amended) it is only necessary for the transferor to sign the claims: the trustees do not have to sign. The reason for this unilateral, donor only, claim is presumably that it could be a breach of trust for the trustees to agree to take over the donor's base value.
CGT holdover claim pursuant to s.124 of and sched 14 to the FA 1989 amending ss.126 and 147 of and sched 4 to the CGTA 1979 (individual's gift/disposal into trust).
To: HM Inspector of Taxes
(Address)
(Taxpayer/donor's reference number)
Dear Sir,
Re: Transfer dated [ 19 ], by way of gift of [shares of £1 each fully paid in the capital of [ ] Limited] from [donor] to [AB and CD] being trustees of a settlement dated [ 19 ] and made between [here set out parties to the settlement].
Claim pursuant to s.126(1) of the Capital Gains Tax Act 1979 as amended and Finance Act 1989 s.124 and sched 14 (hereinafter together referred to as 'the statutory provisions'.)
I the undersigned, being the transferor to the above recited [share transfer] hereby give you notice that in pursuance of the statutory provisions I claim relief for capital gains tax purposes in respect of any chargeable gain which apart from the st atutory provisions would accrue to me as transferor on the disposal.
The gift constitutes [here describe it eg, business, agricultural assets or trading company's shares or gifts into a discretionary trust]. Accordingly the claim for holdover relief is covered by the statutory provisions particularly (but without prejudice to the generality of the foregoing........).
Please return the attached copy of this notice of claim duly acknowledged by you. Dated this day of 19
Signed......................
(Donor)
We acknowledge receipt of the above recited notice under the statutory provisions referred to.
Dated 19
Signed......................
HM Inspector of Taxes
Precedent 3
Where trustees of a settlement appoint the whole or part of the trust fund to one or more beneficiaries absolutely under sched 14 para 3 amending para 2 of sched 4 to the CGTA the claim must be signed by the transferring trustees and the receiving beneficiaries.
CGT holdover claim pursuant to s.124 of and sched 14 to the FA 1989 amending ss.126 and 147 of and sched 4 to the CGTA 1979 (trustees' distribution to beneficiaries absolutely).
To: HM Inspector of Taxes
(Address)
(Taxpayer/donor's reference number)
Dear Sir,
Re: Transfer dated [ 19 ], by way of gift of [shares of £1 each fully paid in the capital of [ ] Limited] from [AB] and [CD] being trustees of a settlement dated [ 19 ] made between [here set out parties to the settlement] to [[EF] [GH] the relevant beneficiaries].
Claim pursuant to s.126(1) of the Capital Gains Tax Act 1979 as amended and Finance Act 1989 s.124 and sched 14 (hereinafter together referred to as 'the statutory provisions').
We, the undersigned being the transferors and the transferees respectively to the above recited [share transfer] hereby give you notice that in pursuance of the statutory provisions we claim relief for capital gains tax purposes in respect of any chargeable gain which apart from the statutory provisions would accrue to us as transferors on the disposal.
Certified true copies of the above recited [share transfer] and settlement are attached.
The gift constitutes [here describe it eg, business, agricultural assets or trading company's shares or gifts into a discretionary trust]. Accordingly the claim for holdover relief is covered by the statutory provisions particularly (but without prejudice to the generality of the foregoing........).
Please return the attached copy of this notice of claim duly acknowledged by you. Dated this day of 19
Signed......................
(Donor trustees)
Signed......................
(Donor beneficiaries)
We acknowledge receipt of the above notice under the statutory provisions referred to.
Dated 19
Signed......................
HM Inspector of Taxes
Precedent 4
Likewise, para 3 of sched 14 amending para 2 of sched 4 to the CGTA, where trustees appoint the whole or part of the trust fund to trustees of a new settlement, the claim must be signed by the transferring trustees.
This is used in circumstances where CGT is payable and holdover relief is available. In this case the receiving trustees do not have to sign the claim, the reason for this is, again, that presumably it could be a breach of trust for the receiving trustees to agree to take over the appointing trustee's base value.
CGT holdover claim p ursuant to s.124 of and sched 14 to the FA 1989 amending ss.126 and 147 of and sched 4 to the CGTA 1979 (trustees' distribution to new trustees).
To: HM Inspector of Taxes
(Address)
(Taxpayer/donor's reference number)
Dear Sir,
Re: Transfer dated [ 19 ], by way of gift of [shares of £1 each fully paid in the capital of [ ] Limited] from [AB] and [CD] being trustees of a settlement dated [ 19 ] and made between [here set out parties to the settlement] (1) [EF] and [GH] being trustees of a settlement dated [ 10 ] and made btween [here set out the parties to the new settlement] (2).
Claim pursuant to s.126(1) of the Capital Gains Tax Act 1979 as amended and Finance Act 1989 s.124 and sched 14 (hereinafter together referred to as 'the statutory provisions').
We, the undersigned being the transferors to the above recited [share transfer] hereby give you notice that in pursuance of the statutory provisions we claim relief for capital gains tax purposes in respect of any chargeable gain which apart from the statutory provisions would accrue to us as transferors on the disposal.
Certified true copies of the above recited share transfer and settlement are attached.
The gift constitutes [here describe it eg, business, agricultural assets or trading company's shares or gifts into a discretionary trust]. Accordingly the claim for holdover relief is covered by the statutory provisions particularly (but without prejudice to the generality of the foregoing ........).
Please return the attached copy of this notice of claim duly acknowledged by you.
Dated this day of 19
Signed......................
......................
(Donor trustees)
We acknowledge receipt of the above recited notice under the statutory provisions referred to.
Dated 19
Signed......................
HM Inspector of Taxes