Gift Holdover Relief: Deferring CGT on Gifts of Business Assets and Shares

When assets are given away as a gift, the donor is treated as disposing of them at market value for CGT purposes — a "deemed disposal" under s.17 TCGA 1992. Without relief, a gift could trigger a substantial CGT liability even though no cash has been received. Gift holdover relief (sections 165 and 260 TCGA 1992) addresses this by allowing the CGT gain to be "held over" — transferred to the recipient, who takes the asset at a reduced base cost. The donor pays no CGT on the gift; the recipient pays CGT on the entire deferred gain (plus any new gain) when they eventually sell.

Gift holdover relief is an important tool in estate and succession planning, particularly for business owners wishing to transfer shares to family members or into trust. It does not eliminate CGT; it defers it and shifts it to a different taxpayer.

Section 165: Business Assets Holdover

Section 165 TCGA provides holdover relief for gifts of qualifying business assets. The qualifying categories include:

Assets Used in a Trade

Business assets (land, buildings, fixed plant and machinery) used in the donor's trade, or in the trade of a personal company in which the donor owns shares, qualify for s.165 holdover. The asset must have been used in a qualifying trade at the time of the gift — assets held for investment purposes do not qualify under s.165 (they may qualify under s.260 in different circumstances).

Shares in Unquoted Companies

Shares in unquoted trading companies (companies not listed on a recognised stock exchange) qualify for holdover relief under s.165, provided the company is a trading company (not an investment company) or the holding company of a trading group. "Unquoted" includes AIM shares, as AIM is not a recognised stock exchange for this purpose.

Shares in Personal Companies

Where the donor owns at least 5% of the ordinary share capital in a quoted company, those shares also qualify for s.165 holdover, provided the company is a qualifying trading company. This is a narrower category — it covers a business owner who holds qualifying shares in a listed company.

Conditions

Both donor and recipient must be UK resident at the time of the gift. If either is non-UK resident, s.165 holdover is not available (with limited exceptions). The gift must be a genuine gift — a sale at undervalue may qualify for partial holdover in proportion to the undervalue element, but a sale at market value does not.

Section 260: Holdover on Gifts Subject to an IHT Charge

Section 260 TCGA provides holdover relief on a different basis: where the gift is itself subject to an IHT charge (an "immediately chargeable transfer"), regardless of whether the asset is a business asset. This is particularly relevant for:

• Gifts to discretionary trusts: a gift to a discretionary trust is a Chargeable Lifetime Transfer (CLT) for IHT purposes. If the CLT exceeds the donor's available nil-rate band (£325,000 as at 2026, subject to any prior CLTs in the previous seven years), IHT is payable at 20% on the excess (the "lifetime rate"). The existence of this IHT charge triggers s.260 holdover, regardless of whether the asset is a business asset.
• Gifts subject to Immediate IHT charge: any transfer that gives rise to an IHT charge other than a Potentially Exempt Transfer (PET) can benefit from s.260.

Key distinction from s.165: s.260 holdover is not restricted to business assets. Any asset — shares, investment property, cash (where structured appropriately), quoted shares — can be held over under s.260 provided the transfer is immediately chargeable to IHT.

The Interaction with Inheritance Tax: PETs vs CLTs

The distinction between s.165 and s.260 matters in the context of IHT planning:

Potentially Exempt Transfers (PETs)

Gifts to individuals are PETs. If the donor survives seven years, the gift falls outside the IHT estate entirely. PETs are not immediately chargeable to IHT, so s.260 holdover does not apply to gifts to individuals. Only s.165 holdover (requiring qualifying business assets) is available for gifts to individuals.

Chargeable Lifetime Transfers (CLTs)

Gifts to discretionary trusts and certain other trusts are CLTs, immediately subject to IHT. As noted, s.260 holdover applies. The practical result is:

• A gift of non-business assets (investment property, quoted shares) to an individual has no holdover relief available. CGT is payable by the donor.
• The same gift to a discretionary trust triggers s.260 holdover (because the IHT charge arises), deferring the CGT to the trustees.

This creates a planning asymmetry: donors wishing to transfer non-business assets into family estate planning structures can obtain CGT holdover by routing the gift through a trust, at the cost of making a CLT for IHT.

The Mechanics of the Holdover

When holdover relief is claimed, the donor's capital gain is effectively transferred to the recipient:

• The donor has no CGT liability on the gift.
• The recipient receives the asset with a base cost equal to the donor's original base cost, minus any amount already allowed for. In practice: new base cost = market value at date of gift minus held-over gain.

The held-over gain therefore becomes embedded in the recipient's base cost. When the recipient sells, their gain is calculated from the reduced base cost — the deferred gain crystalises.

Example: Donor gifts shares worth £500,000, with original base cost of £100,000. Gain of £400,000. Holdover relief claimed. Donor pays no CGT. Recipient takes shares at base cost of £100,000 (i.e., £500,000 market value minus £400,000 held-over gain). When recipient sells for £700,000: gain = £700,000 minus £100,000 = £600,000 (the original £400,000 deferred gain plus £200,000 new gain).

Pitfalls and Clawback

Recipient Sells Quickly

Holdover relief is not a long-term deferral if the recipient sells the asset promptly. The entire held-over gain becomes payable on the recipient's disposal. Gifts to family members with the expectation of rapid resale should be reviewed carefully — HMRC may also challenge the commercial purpose of such arrangements.

Non-UK Residence of Recipient

If the recipient becomes non-UK resident before selling the asset, the UK's ability to collect CGT on the deferred gain may be compromised. Anti-avoidance rules provide that where holdover relief has been claimed and the donee becomes non-UK resident within six years, a CGT charge crystallises on the held-over gain at that point. This is a significant pitfall for gifts to children who subsequently emigrate.

IHT Clawback of Business Assets

Where business assets are held over under s.165, the recipient typically also benefits from Business Property Relief (BPR) for IHT purposes (on shares in unquoted trading companies, BPR provides 100% IHT relief). However, if the recipient fails to hold the assets for the two-year minimum BPR qualifying period, BPR is withdrawn — exposing the recipient to an IHT liability on the gift. Holdover recipients should be aware of this two-year holding period.

Gifts with Reservation

If the donor makes a gift but retains a benefit (for example, continues to occupy a property gifted to a child), the asset is treated as still within the donor's estate under the gifts with reservation of benefit rules (FA 1986, s.102). Where a reservation of benefit applies, neither the gift nor the holdover is effective for IHT purposes. CGT holdover, however, may still apply to the initial transfer — creating a complex interaction where CGT is held over but IHT has not been removed.

Interaction with BADR

Where holdover relief has been used and the recipient later sells the shares as a qualifying disposal, the deferred gain may qualify for BADR (18% rate for 2026/27, subject to conditions including two-year ownership by the recipient). The held-over gain and any new gain may therefore both qualify for BADR on the recipient's disposal. This can produce a very tax-efficient outcome — holdover deferral followed by BADR-rate realisation.

For shares in unquoted trading companies, the interaction between s.165/s.260 holdover and BADR on a subsequent sale by the recipient should be modelled carefully when planning inter-generational transfers.

Compliance Caveat

Gift holdover relief is subject to strict conditions and anti-avoidance provisions. The residence requirements, the business asset definition, the interaction with IHT reserved benefits, and the BADR conditions are all areas where errors are common. HMRC scrutinises holdover relief claims, particularly where gifts are made to close family members shortly before a sale. Both s.165 and s.260 elections must be made jointly by donor and recipient (or donor and trustees) on the prescribed form (HS295). Claims made late or without the joint signature cannot be accepted. This guide reflects the law as at June 2026. CGT rates, BADR rates, and IHT nil-rate bands are subject to change in Finance Acts. Professional advice from a specialist in capital gains tax and estate planning is essential before making gifts of significant value.

How Global Investments Can Help

Global Investments advises HNW clients and business owners on inter-generational wealth transfer strategies, including the use of gift holdover relief in combination with trusts, BPR assets, and BADR planning. For internationally mobile families, we pay particular attention to the residence positions of both donor and recipient and the implications for deferred CGT crystallisation. Contact us to discuss how holdover relief might feature in your estate and succession planning.