December 2021
In this month’s ‘Keep It Simple’ article, Neil Da Costa tackles a popular topic that features regularly in tax exams and perplexes students: gift relief.
When a business is gifted from one individual to another, the disposal takes place at market value. This creates a large CGT liability for the donor.
To avoid this, HMRC have introduced s165 TCGA 1992 Gift Relief. This allows the donor and donee to make a joint election within four years from the end of the tax year of disposal to postpone the donor’s gain until the donee eventually sells the business in the future.
Gift relief (GR) can be claimed on both unincorporated businesses and shares in a personal trading company. The main condition that must be satisfied is that the asset must be used in the business trade.
Assets like rental buildings are investments and are specifically excluded from GR.
Gift relief for sole traders
The majority of a sole trader’s assets such as current assets, machinery and cars are exempt assets, and the only chargeable assets are likely to be buildings and goodwill.
The donee might chose to pay some consideration for the business to allow the donor to claim BADR and use up the annual exemption.
Simple example: Sanjay and Priya
Sanjay has been running his pharmacist business for many years. Assume the business only has chargeable assets. He bought the business for £100,000 and it is now worth £500,000. He decides to sell the business to his daughter Priya for a discounted price of £200,000.
Sanjay and Priya make a joint election to postpone the gain under gift relief.
Solution to Sanjay and Priya
The first step is to compute the gain using market value as deemed sale proceeds (£500,000 – £100,000) = £400,000 gain.
As Priya has paid £200,000 for the business, we now compute the gain due to cash which
cannot be postponed under gift relief (£200,000 £100,000) = £100,000.
The gift relief is computed as a balancing figure (£400,000 – £100,000) = £300,000.
This is postponed by deducting it from Priya’s deemed cost of £500,000.
Priya’s base cost which will be used in the future disposal is (£500,000 – £300,000) = £200,000.
Sanjay’s gain that crystallises immediately is £100,000. The benefit for Sanjay is he can use up his annual exemption and claim BADR.
Sanjay has owned the sole business for at least two years, so the gain is eligible for BADR and taxed at just 10%.
Sanjay’s CGT liability is (£100,000 – £12,300) = £87,700 x 10% = £8,770.
Gift relief for shares
GR can be claimed on any trading company unquoted shares. With regard to quoted shares, the individual must own at least 5% OSC.
GR is not available on investments so if the company owns investments, the GR is restricted to chargeable business assets/ chargeable assets.
Simple example: Lorraine and Shane
Lorraine has been a director of an unquoted technology company for many years and her 20% shareholding is worth £1m.
Only 70% of the company’s chargeable assets are business assets.
Lorraine decides to gift the shares to her nephew Shane, who is a manager in the same company. The gain on the shares is £800,000.
Lorraine and Shane make a joint election to postpone the gain under gift relief.
Solution to Lorraine and Shane
The gift relief will be restricted to the 70% chargeable business assets as the company owns investments. (£800,000 x 70% = £560,000).
The remaining 30% of the gain will crystallise immediately on Lorraine. (800,000 x 30%) = £240,000.
This gain will be eligible for BADR as Lorraine is employed by the company and has owned the shares for at least two years.
Lorraine’s CGT liability is (£240,000 – £12,300) = £227,700 x 10% = £22,770.
Shane’s base cost will be (£1m – £560,000) = £440,000 and will be used in future disposals.
Emigration of the donee
In order to claim gift relief, the donee must be UK resident at the time of the gift. Non resident individuals can escape paying CGT on some UK assets. As a result, if the donee emigrates within six years from the end of the tax year of disposal, then the postponed gain crystallises on the donee on the day before emigration.
Simple example: Lorraine and Shane
Five years later, Shane gets a lucrative offer from a technology company in Silicon Valley and decides to emigrate to the US. Explain what happens to the deferred gain of £560,000.
Solution to Lorraine and Shane
The deferred gain of £560,000 will crystallise for Shane on the day before he emigrates.
Shane has been employed by the company and has owned the shares for at least two years, so his gain is eligible for BADR.
Shane’s CGT liability is (£560,000 – £12,300) = £547,700 x 10% = £54,770.
• Neil Da Costa is a Senior Tax Lecturer with Kaplan in London. He is the author of Advanced Tax Condensed which summarises the entire syllabus using memory joggers.
