Capital Gains Holdover Relief: How s165 and s260 work

What is CGT holdover relief?

In short, Capital Gains Tax (CGT) holdover relief is a form of tax deferral that allows individuals to postpone paying CGT on certain gifts of assets. Also known as gift relief, CGT holdover relief provides a mechanism to defer CGT that would otherwise arise when certain assets are gifted or transferred. It is designed to prevent tax from becoming a barrier to asset succession by eliminating a "dry" tax charge - a situation where tax liability arises without the individual having funds to pay it.

The two primary CGT holdover relief provisions within the Taxation of Chargeable Gains Act 1992 (TCGA) are:

  • Section 165: Relief for gifts of business assets
  • Section 260: Relief for transfers subject to immediate Inheritance Tax (IHT) charges.


The purpose of holdover relief

Both s165 and s260 serve the same fundamental purpose: to defer CGT on gifts until a subsequent disposal by the recipient. This prevents tax considerations from hindering the succession of assets, particularly within families or for business succession planning.

Instead of the donor/transferor paying CGT immediately, the taxable gain becomes payable by the recipient when they eventually dispose of the asset. This creates a tax-efficient mechanism for transferring wealth or business interests.


S165 holdover relief

Qualifying Assets

S165 relief applies specifically to:

  • Business assets, including shares and securities in certain trading companies
  • Agricultural property not used in a business (under s165(5))

Common Application Scenarios

S165 relief is primarily used in two scenarios:

1.    Where a sole trade, partnership interest, or shares in a trading company are gifted to family members or certain family trusts

2.    On incorporation of a sole trader or partnership as an alternative to incorporation relief - which typically involves a gift or sale at undervalue to a company owned by the donor.

Consideration should be given to making a s165 election even if there is no CGT liability arising on the disposal. This is because if the donor were to die within seven years, the donee would receive an uplift to their CGT base cost for the asset equal to the inheritance tax (IHT) payable on the lifetime gift.

Conditions and Restrictions

For s165 holdover relief to apply, several eligibility conditions must be met regarding:

  • The nature of the asset
  • The relationship between donor and donee
  • The business status of the asset

Relief may be restricted or denied if these conditions are not fully satisfied. It's important to note that holdover relief on residential property is generally not available under s165.


S260 holdover relief

Qualifying transfers

S260 holdover relief applies to disposals that are:

3.    Chargeable transfers for IHT purposes (or would be but for the annual £3,000 exemption)

4.    Exempt IHT transfers made:

  • To political parties
  • For public benefit
  • To maintenance funds for historic buildings
  • As conditionally exempt transfers designated by HM Treasury

5.    Transfers involving accumulation and maintenance trusts, bereaved minor trusts, or 18-25 trusts

6.    Transfers of works of art with IHT relief

7.    Certain transfers between settlements

Importantly, Potentially Exempt Transfers (PETs) for IHT purposes are excluded, even if they later become chargeable due to the transferor's death.  

A central feature of s260 holdover relief is that while the transfer must be "chargeable" to IHT, there is no requirement for the IHT to actually be paid. The relief remains available even when the transfer is covered by the nil rate band, business relief, or other IHT exemptions.


Key differences between s165 and s260

Priority: If conditions for both s260 and s165 are met, s260 has priority. This means most gifts involving trusts fall under s260 rather than s165, unless the trust is a qualifying interest in possession trust.

Scope:

  • S165 focuses primarily on business assets and is commonly used for family succession planning or business incorporations
  • S260 is typically used for transfers to and from trusts, including holdover relief discretionary trust scenarios, but also applies to other transfers subject to immediate IHT charges

Anti-avoidance measures: 

S165 includes measures that can restrict the quantum of relief available on a gift of shares where the underlying company holds chargeable assets that are not used in its trade.  S165 relief on other assets might also be restricted to the extent that they were not used in the trade throughout their ownership.

S260 contains specific anti-avoidance provisions restricting relief when the transferee is:

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


How holdover relief works

The mechanics of the relief are similar under both sections:

For the donor: The chargeable gain is reduced by the amount held over

For the recipient: The base cost of the asset is reduced by the gain held over

This ensures the gain is not eliminated but merely deferred, with the tax liability effectively passing to the recipient of the gift.


How to make a claim

To claim holdover relief, you'll need to elect by completing a holdover relief claim form. This form is typically submitted as part of your Self Assessment tax return to HMRC.

For s165:

  • A joint holdover election by donor and donee is required
  • For settlements into trust, only the settlor needs to sign

For s260:

  • A joint election by donor and donee is generally required
  • When assets are transferred to a trust, only the settlor needs to sign
  • Trustees must sign if there is a claim to defer agreement of valuations


Should you be using CGT holdover relief?

Changes to IHT business and agricultural reliefs planned from 6 April 2026 have prompted many individuals and their advisers to consider the potential tax advantages of giving away assets to a trust during your lifetime, rather than on death. Clearly, the availability of CGT holdover relief is crucial to the costs of making such lifetime gifts. 

Therefore, careful consideration of the specific conditions and potential restrictions is essential to ensure you are claiming the relief properly. If you think holdover relief could apply to your situation, there are a few things you will need to consider. 

8.    You would need to obtain professional valuations of the assets being transferred to establish accurate base costs if you do not make an electionMake sure you maintain comprehensive records of all elections and claims

  • Plan the timing of your transfers strategically in relation to other tax events
  • Exercise caution with gifts outside family contexts, as these could be recharacterized as disposals
  • Get professional advice from specialists familiar with the reliefs.


Helping you to get holdover relief right 

These reliefs can be important tools for family businesses, high-net-worth individuals, and those utilizing trust structures. When applied correctly, they can facilitate smooth succession of assets while deferring tax liabilities to more appropriate times. 

In all situations, understanding the nuances of holdover relief can is vital to ensure that the tax deferral is achieved. If you are considering using CGT holdover relief, get in touch with our expert team, who will be happy to help.

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