Capital Gains Tax Issues: Holdover Relief
The Holdover Relief for business assets focuses mainly on disposals (other than bargains conducted at arm’s length) and as such, is, applicable to both gifts and transfers which are marked at less than current market value. (An arm’s length transaction is where the buyer and seller have no relationship to each other and each acts in their own self interest, without being subject to any extenuating pressure).
If there is no payment received for the disposal OR it is LESS than the transferor’s allowable expenditure (excluding any available Capital Gains Relief), the entire gain that would have been taxable may be held-over. There is NO tax on the gain at the time of the disposal, but the gain that would have been taxed (but for the relief) is deducted from the transferee’s base cost. The Held-Over gain is included in Capital Gains computation on any future disposal by the transferee.
Holdover Relief allows you to defer tax till a time when the company eventually disposes of the business assets in the future. However if the business itself is sold off as an entity, then it is the shares that are sold and the Held-Over gain remains a company asset.
When business assets are gifted to a company for less than their market value, a formal claim needs to be submitted with the sole trader’s/partners’ tax return for the final period of the unincorporated business.
Unlike Roll-Over Relief, (where shares are issued in exchange for the business assets), here the company is commonly established with only nominal share capital.
To qualify for the relief, the business owner will “gift” the business assets to a linked company. This is referred to as “a disposal, otherwise than by way of a bargain at arms length”. The company must be UK based and NOT under the control of non-UK residents.
The gift does not need to be for nil payment, it can be a “partial gift”, whereby the business is sold for an amount less than the value of the base cost of the business. However, if any payment (or sale proceeds) exceeds the base cost of the assets, the relief will be restricted by the excess of actual proceeds over original cost. The base cost is not dependant on a time frame, (it is un-indexed). If payment is paid equal to the indexed base cost, this will result in a restriction of the relief.
Business creditors and liabilities cannot be “gifted” to the company. If the company wishes to settle accrued pre-incorporation obligations, then the transferred business assets will constitute payment. Stamp duty remains payable in terms of documents relating to the transfer of debtors and receivables, thus these are not gift-able. Receipts will be enough to satisfy liabilities.
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