Back to basics – Section 260 holdover relief

Paul Townson and Sophie Mehta in our Birmingham office co-authored “Back to basics – Section 260 holdover relief”, published by Tax Journal on 2 June 2023.

The transfer of an asset from an individual or a trust is a disposal for CGT purposes, irrespective of whether any consideration is received. There are two available CGT gift holdover relief claims – under TCGA 1992 s 165 and s 260. The reliefs aim to prevent tax from being a hurdle to the succession of acceptable assets by ensuring that a dry tax charge does not arise on a gift. Section 260 is in place for a transfer of value on which there is an immediate charge to IHT, even if no IHT is actually paid as a result of IHT exemptions and/or reliefs. Typically, s 260 relief is available on transfers of value to and from trusts, but it is also available on several other types of transfers. For the donor, an election results in the chargeable gain being reduced by the held over again; for the donee, the base cost is reduced by the quantum of the gain held over. A joint election by the donor and donee is required, except for settlements into trust, where only the settlor need sign (however, the trustees do need to sign to defer agreement of values).

The article includes sections on:

• The purpose of S 260 gift relief
• Disposals to which s 260 relief applies
• How holdover relief works
• Restrictions to the relief, and anti-avoidance measures
• Private residence relief (PRR) and gift relief
• CGT and IHT interactions for s 260
• How to make the claim.

Relief under TCGA 1992 s 260 (‘s 260 relief’) is available on lifetime transfers that are immediately chargeable to IHT and to certain other transfers, as set out below. The effect of the relief, if available and claimed, is broadly to defer all or part of the CGT liability which would otherwise arise on the disposal of a chargeable asset, normally until a later disposal by the recipient of the gift. Essentially, the gain is passed onto the recipient, as well as the gift itself.

Disposals to which s 260 applies must be made otherwise than by way of a bargain at arm’s length, and represent one of the following:

1. A chargeable transfer for IHT purposes under IHTA 1984 s 19, or one which would be so chargeable but for the annual £3,000 exemption. Please note that PETs are excluded, even if they later become chargeable as a result of the transferor’s death.

2. Exempt transfers for IHT purposes made:

• To political parties (IHTA 1984 s 24);
• For public benefit (IHTA 1984 s 26);
• To maintenance funds for historic buildings (IHTA 1984 s 27); or which are conditionally exempt transfers under IHTA 1984 s 30, as designated by HM Treasury.

3. Property held on certain types of trust, including accumulation and maintenance trusts (IHTA 1984 s 71), bereaved minor trusts (IHTA 1984 s 71B) and 18–25 trusts (IHTA 1984 s 71E).

4. Transfers of works of art that do not incur an immediate charge to IHT as a result of relief under IHTA 1984 s 78.

5. Transfers of certain property between settlements where there is no charge to IHT, or a reduced charge to IHT under IHTA 1984 Sch 4 (maintenance funds for historic buildings).

Section 260 gives relief where the transfer is ‘chargeable’ to IHT, or falls within 2-4 above. There is no requirement for IHT to have actually been paid on the transfer for the relief to be available. For example, if a settlor makes a gift to a discretionary trust, and the transfer is covered either by the settlor’s nil rate band or business relief, etc, even though no IHT is payable, a gift relief claim can still be made for CGT purposes. The value of the asset transferred will always be the open market value of the asset at the date of gift.

Anti-avoidance provisions apply when the transferee is one of the following:

• A settlor-interested trust;
• A dual resident trust;
• A non-UK resident individual; or
• A foreign controlled UK company.

It is not possible to make a s 260 claim on a gift of assets into a settlor-interested trust, i.e. a trust from which the settlor, his/her spouse/civil partner or minor children can benefit.

In most instances, a s 260 claim is made jointly by the donor and the donee. This is not the case when the donee is a trust. If the settlor transfers assets to a trust and wishes to defer the gain, the claim will be made by the settlor only, and the consent of the trustees will not be required (unless a claim to defer agreement of valuations is being made).

For further information, or for assistance, please contact Paul Townson or Sophie Mehta.