How to transfer shares and assets tax free: what is gift relief?
On first principles a gift of shares or certain capital assets is a taxable transaction, even if no consideration is given.
Gift relief is a tax provision that allows certain assets to transfer without capital gains tax being charged. It’s particularly a helpful tool for passing on assets to family members. In this guide, we’ll break down gift relief in plain English, providing you with a clear understanding of its basics.
What is Gift Relief?
Gift relief, also known as hold-over relief, is a tax relief provided by HM Revenue and Customs (HMRC) in the UK. It allows the transfer of certain assets without triggering capital gains tax (CGT) at the time of the transfer. Instead, the person receiving the gift may be liable for CGT in the future when they eventually sell or dispose of the asset.
Eligibility for Gift Relief
For gift relief to apply, certain key criteria must be met:
1. The Recipient Must Normally Be UK Residents: The Transferee must be within the charge to UK tax to avoid the gain permanently being avoided in the UK.
2. The Asset Must Qualify: Not all assets are eligible for gift relief. It usually applies to trading business assets, shares in qualifying companies, and certain other assets used in a business, although transfers into trusts are less restricted.
How Does Gift Relief Work?
Sarah owns 100% of the shares in a trading company called ‘Tech Innovators Ltd.’ The company specialises in developing cutting-edge software solutions and has been operating successfully for the past decade.
Sarah’s daughter, Emily, has shown a strong interest in technology and innovation. Sarah believes that Emily has the skills and passion to continue the company’s success.
Share Transfer Process with Gift Relief
1. Valuation: The company’s value is assessed, and it’s determined to be worth £600,000.
2. Gift of Shares with Gift Relief: Sarah decides to gift 40% of the company’s shares (40 shares) to Emily. This is a gift, not a sale, and is done without any monetary exchange.
3. Claiming Gift Relief: Since Tech Innovators Ltd. is an unquoted trading company, Sarah is eligible to claim Gift Relief. This means that for capital gains tax purposes, the gain on the disposal of the shares is considered nil. Therefore, Sarah does not owe any CGT on the gift.
4. Reporting to HMRC: Sarah reports the share transfer to HMRC as part of her self-assessment tax return together with a gift relief claim. She provides the necessary details, including the value of the shares and the beneficiary (Emily).
Tax Implications
1. Gift Relief Benefit: By utilising Gift Relief, Sarah avoids any immediate capital gains tax liability on the share transfer. This makes the transfer a tax-efficient way to pass on the business.
2. Future Potential Tax Implications: Emily’s ‘base cost’ for the shares will be the amount Sarah could have deducted against a third party disposal gain. This means that if Emily eventually sells the shares in the future, she may be liable for capital gains tax on the value increase since Sarah’s original purchase.
If the company’s assets include non-trading assets then additional considerations would be required.
For more information please contact martin.adams@ballardsllp.com or call 01905 794 504.
Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
