ATXP6 UK
Syllabus A2. Chargeable gains A2a. The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

A2a. Holdover relief

Syllabus A2a)

C6 The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

Holdover relief

If the new asset purchased is a depreciating asset (an asset with an expected life of 60 years or less at the time of acquisition) for example, leasehold land and buildings or fixed plant and machinery the gain arising on the disposal of the old asset is not rolled over and cannot be deducted from the cost of the new asset.

Instead, the gain is to be temporarily frozen or “held over” until it becomes chargeable on the earliest of the 3 following dates:

  1. Date on which the new asset is disposed of.

  2. Date on which the new asset ceases to be used in the trade.

  3. 10th anniversary of acquisition of the new asset.

Illustration:

Craig purchased a freehold factory in 2009 for £100,000.

In June 2016 he sold it for £300,000 and purchased a leasehold factory with a 55-year lease for £350,000 in December 2018.

Craig then sold the leasehold factory in October 2019 for £400,000.

  • What capital gain will be chargeable in the tax year 17/18 and in 18/19?

Solution:

  • 17/18 capital gain:

    Disposal proceeds £300,000

    Acquisition cost (£100,000)

    Capital gain £200,000

    Gain held over (W1) (£200,000)

    Chargeable gain Nil

  • 18/19 Capital gain:

    Disposal proceeds £400,000

    Acquisition cost (£350,000)

    Capital gain £50,000
    +
    Capital gain held over £200,000

    Total capital gain £250,000

W1:

Disposal proceeds received £300,000

Disposal proceeds reinvested (£350,000)

Capital gain now Nil

  • Therefore, the entire gain (£200,000) will be held over as all of the disposal proceeds are reinvested.

Note:

The £200,000 capital gain held over becomes chargeable in the tax year 2018/19 because the asset against which it was held over has been sold.

Also note that the gain held over was not deducted from the cost of the new asset, it was held over in its own right.

No holdover relief for assets that do not qualify.

Holdover relief is available for qualifying business assets (chargeable business assets). 

Qualifying business assets are basically assets that are used in the business, not assets held for investment (chargeable assets).

Therefore, if a gift is made of unquoted shares (a qualifying business asset), holdover relief is available for the capital gain, however it will not be available for the proportion of assets held by the business for investment (non-business) purposes.

Illustration

On 5 October 2018, Tina made a gift of her entire holding of 20,000 £1 ordinary shares in Banana Ltd, a personal company, to her daughter.

The market value of the shares on that date was £200,000. 

The shares had been purchased on 1 January 2016 for £140,000.

On 5 October 2018, the market value of Banana Ltd’s chargeable assets was £150,000, of which £120,000 was in respect of chargeable business assets.

Tina and her daughter have elected to hold over the gain as a gift of a business asset.

What chargeable gain will arise on this gift?

Solution

Tina’s chargeable gain for 2018–19 is:

Deemed proceeds   £200,000  
Cost                         (£140,000)  
                                £60,000  
Holdover relief        (£48,000)   W1
                                 £12,000

WI

Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), the proportion of chargeable assets to chargeable business assets.