Transferring valuable assets to the next generation is often a strategic part of succession planning.
But when those assets have appreciated in value, doing so can come with a hefty Capital Gains Tax (CGT) bill.
Fortunately, certain provisions in UK tax law offer legal ways to defer this charge, and (in some cases,) avoid it altogether.
Here’s how Sections 165 and 260 of the Taxation of Chargeable Gains Act (TCGA) can help.
(Read Time: Approx. 6 minutes)
Topics Discussed:
- Tax-Efficient methods to defer or avoid CGT when gifting business or personal assets
- How Sections 165 and 260 TCGA work in practice and who can benefit
What Is Capital Gains Tax and When Is It Triggered?
Capital Gains Tax is usually payable when an asset that has increased in value is sold or transferred.
However, HMRC treats gifts as disposals, so even giving away an asset can trigger CGT based on its market value at the time of the gift.
This rule applies even if no money changes hands and the recipient is a close family member or a connected person.
But the UK tax system allows for certain exceptions.
If the asset qualifies as a business asset, and if specific conditions are met, CGT can be deferred using mechanisms known as “holdover reliefs”.
Using Section 165 for Business Asset Holdover Relief
Section 165 TCGA offers a way to defer CGT when you give away qualifying business assets, such as shares in a trading company or assets used in a business you own.
Here’s how it works:
- You don’t pay CGT at the time of the gift.
- Instead, the gain is “held over” and passed on to the recipient.
- The recipient inherits your base cost and only pays CGT when they eventually sell the asset.
For example, if you gift your child shares in your business worth £300,000 that you originally bought for £100,000, you defer tax on the £200,000 gain.
Your child then takes over with a base cost of £100,000 and pays CGT only if and when they sell the shares.
This relief is commonly used by business owners looking to pass on shares to their children as part of retirement or estate planning.
It can also apply to gifts into certain types of trusts.
Using Section 260 for Gifts into Trusts
Section 260 TCGA extends the same principle to assets gifted into a relevant trust, even if they’re not strictly business assets.
It also applies when assets are gifted to individuals, provided there’s an inheritance tax (IHT) charge that arises at the same time.
This can be helpful if:
- You don’t pay CGT at the time of the gift.
- Instead, the gain is “held over” and passed on to the recipient.
- The recipient inherits your base cost and only pays CGT when they eventually sell the asset.
However, to qualify under Section 260, the gift must be a chargeable lifetime transfer for IHT purposes.
It’s a more technical route but one that can be effective in long-term estate planning strategies.
Strategic Uses in Succession and Retirement Planning
Holdover relief is particularly attractive when planning for the future of a family business.
If you’re retiring and want to start passing ownership down to the next generation, Section 165 allows you to do so without triggering an immediate CGT bill.
Similarly, if you’re incorporating a property portfolio into a limited company for genuine business reasons, you might be eligible for deferral under these sections.
However, be cautious: HMRC has clamped down on misuse of this route, especially where the “business” reasoning is unclear or contrived.
Important Conditions and Risks
These reliefs are not automatic. You must:
- Make a formal holdover election.
- Ensure that all eligibility criteria are met.
- Be aware that the deferred gain does not disappear; it is simply postponed.
Moreover, gifting assets is not just a tax exercise. It has legal, commercial, and emotional implications, particularly if you’re involving trusts, minor children, or complex family dynamics.
Important Conditions and Risks
While CGT can be deferred using Sections 165 and 260, other taxes might still apply:
- Stamp Duty Land Tax (SDLT) may be due if there’s a mortgage or other consideration involved.
- Inheritance Tax (IHT) might be triggered if you die within seven years of making the gift, especially if you continue to benefit from the asset — a classic ‘gift with reservation’ scenario.
- Income Tax implications may arise if the gifted asset produces rental or other income.
It is also worth noting that HMRC can investigate the commercial justification behind gifts, especially if they involve transfers to companies or trusts.
Summary
Deferring Capital Gains Tax through Section 165 and Section 260 can be a powerful way to manage wealth transfer and succession planning without triggering an immediate tax charge.
Whether you’re passing on business shares, property, or placing assets in trust, these reliefs provide essential tools for long-term planning.
But this is a complex area, and getting it wrong can lead to severe tax consequences.
Get in touch with us at Tax Expert, and we can and help you correctly and compliantly structure the transfer.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel