Case study - Gift Relief and the alternatives

If you want to gift someone property or significant assets, its important to understand how Gift Relief works and what alternative approaches are available.

Gift Relief is available for the following business assets:

• Shares in an unquoted trading company.
• Shares in a personal trading company greater or equal to 5% of the voting rights.
• Assets used in a sole trader business, partnership or a personal trading company.
• Agricultural land and buildings.

If an asset is gifted and there is a deemed disposal at market value.  As no cash has been received, it may be possible to defer this gain by deducting it from the base costs carried forward for the donee (the person receiving the gift).

Gift relief - how it is calculated:

Sale proceeds (market value)                                                                              X

Less cost                                                                                                                   (X)

Gain before relief less gift relief                                                                           X

Less Gift Relief                                                                                                         (X)

Gain (actual sale proceeds received minus original cost)                            X

Base costs for donee:

Market value                                                                                                             X

Less gift relief                                                                                                          (X)

Revised base costs                                                                                                  X

Example 1

A client bought a furnished holiday cottage for £50,000 in September 1999 which qualifies as a furnished holiday letting.  He gave the cottage to his son in May 2019 when it was worth £190,000.  The son then sold the cottage in March 2020 for £220,000 having used it in the summer for his family.  The son must treat the original cost as his cost to calculate his gain.  The father paid no tax on the deemed disposal.

In order to receive Gift Relief it is necessary for a specific claim to be made.  This is a joint election to be made by the son and the father.  The time limit for the Gift Relief claim is four years from the end of the tax year of disposal.

Example 2

If shares in a personal trading company are the subject of a gift relief claim and the company has non-business assets, the gain eligible for relief will be restricted.  To examine this we would require the balance sheet at the date of disposal of the company.  A gain eligible for Gift Relief may also be considered for Entrepreneur’s Relief.  If a Gift Relief claim is made, it applies before Entrepreneur’s Relief. 

For example, a client owned shares in a personal company.  He gave them to his daughter in December 2019.

We would need to look at the balance sheet of the company, which holds assets as follows:

Premises, machinery, a car, shares in listed companies, stock and cash.

By identifying chargeable assets and chargeable business assets, we can calculate the gain remaining after Gift Relief and claim any relevant Entrepreneur’s Relief and also show the revised base costs for the daughter, of those shares.

In this instance, the premises were chargeable assets. The plant and machinery in this instance were not because they were under the chattels exemption. The car is an exempt chattel for Capital Gains Tax, the shares in listed companies were chargeable assets, stock and cash were not.

We then needed to identify which of those chargeable assets were used in the business. The premises were used in the business but the shares were not regarded as business assets.

We can then work out the gain and work out how much of this gain qualifies for gift relief by taking the gain and multiplying it by the fraction Chargeable Business Assets / Chargeable assets. We can deduct this from the gain.

Entrepreneur’s Relief will be available in respect of the remaining gain provided the father worked in the business.

An Alternative Scenario

If the shares instead of being gifted to the daughter had been sold to her at an undervalue, the part sold at a discount would be a deemed gift, so a sale at an undervalue is treated as a gift for Capital Gains Tax purposes.  A sale at undervalue will result in the gains being left chargeable after a Gift Relief claim has been made, as the gain will be equal to the excess proceeds which equals cash received less base cost.

An example of this would be for instance a client who bought a building for £130,000 in March 2008.  In September 2019 the client transfers the building to his son when it’s worth £400,000.  The building is used in the father’s trade and is therefore a qualifying asset for the purposes of Gift Relief.  The son pays the father £140,000.00 for the asset in September 2019. 

We are able to calculate the gain remaining chargeable after Gift Relief and the son’s base cost. 

A gain on a gift may be eligible for both Gift Relief and Entrepreneur’s Relief.  This would apply for example where a sole trader is gifting the whole of his business or where shares are gifted in a personal trading company for which the donor works.  Where a gain is eligible for both Gift Relief and Entrepreneur’s Relief, Gift Relief is applied first.

If you have any questions please call us on 020 7481 2422 or email us at wellers.wealth@wellerslawgroup.com if you would like to know more.

This case study was written by Ingrid McCleave and the law is correct as at 24th November 2020. Please note that tax legislation changes frequently, so this article should not be relied upon without seeking further legal advice.