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If your business uses, creates or benefits from any items of value, (i.e, a salon will most likely own plenty of styling chairs), you may be able to gift these items without having to pay capital gains tax. This is called the hold-over relief. Read on to find out more.
If your business holds something of value such as cash, raw materials or even equipment, this is called a business asset. Here are some examples of business assets:
Only a sole trader or a business partner will have power to give away or sell business assets. There may be exceptions to this (i.e. you’re the director of the company).
Capital gains tax (CGT) is a tax you pay when you sell an asset for a profit. You owe it when you make a profit more than £6,000 in a tax year (2023/24). So if you sell an asset and cash in a profit of over £6,000 which is the CGT threshold, you’ll have to pay capital gains tax. You only pay CGT on the amount that is over the threshold.
You should also file a tax return, however, if you sell your asset for more than four times the CGT allowance (£24,000 in the 2023/24 tax year), even if your profit is less than £6,000.
Now you might think you’re automatically off the CGT hook if you’re not selling for profit. But not exactly.
Capital gains tax may still apply even if you gift or sell an asset for less. Here’s how it works:
If the current value of the asset you’re selling is more than the price that you bought it for, this will also be considered a taxable gain. So you’ll be liable for capital gains tax.
If you want to know the current capital gains tax rates, read about this here.
🎁 FYI: If you’re gifting any asset to your spouse or to a registered charity, you won’t need to pay capital gains tax. 🎁
The hold-over relief means you may not have to pay capital gains tax when gifting an asset.
If you give a business asset away or sell it for less than it’s worth, you may not have to pay CGT on this by claiming a tax relief. It’s called the hold-over relief.
Just think of it like this:
Your best mate wants to get their business started, so you offer them a hand. You gift them machinery. You bought the machinery for £16,000 but it is now worth £33,000.
Although you’ve not made a profit when gifting the machinery, there is still a gain of £17,000. So you’ll still be liable for capital gains tax.
But because you’ve given a valuable business asset away to help your mate, you’ll be able to claim the hold-over relief and not have to pay capital gains tax on this gain.
No. Whilst you may not have to pay CGT on the gain, the person you gift to might have to pay up. This will be the case if they decide to sell the asset you’ve gifted them.
For example, if your best mate decides to sell the machinery you’ve gifted them, they’ll have to work out:
They’ll have to report this to HMRC and take care of the capital gains tax bill. So if anything, it’s actually a capital gains tax deferral.
Additionally, you’ll have to pay capital gains tax if you sell an asset for less than its current value, but for more than what you paid for it. You’ll still be able to claim the hold-over relief but will have to pay capital gains tax on the profit you earned that’s above the CGT threshold.
Instead of gifting your mate machinery, you sell it to him but throw in a £4,000 discount. It’s still worth £33,000 although you bought it for £16,000. So you sell it to your friend for £29,000.
Whilst you won’t pay CGT on the full £33,000 value of the asset, you’ll still have to pay tax on the profit earned.
You’ll still be able to claim the hold-over relief if you gift certain shares of a company instead of a business asset. As long as the company meets these few requirements:
The hold-over relief needs to be claimed and isn’t an automatic relief.
To do this, you’ll need to fill in the reliefs for gifts and similar transactions helpsheet. Both you and the receiver of the gift will have to sign this form.
The final step is sending the form with your Self Assessment tax return.
🚨 Before gifting, the business asset(s) must have been used only for your business. But if you used any of the assets partly for your business, you can still claim for a partial CGT exemption. 🚨
You bet! 💁
Our accredited accountants can sort your Self Assessment tax return and claim the hold-over relief for you. Simple!
Find out more about TaxScouts’ services here.
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