How to use holdover relief when passing on your business

It can take a lifetime to build and establish a profitable business. So, when the time comes to retire or turn your energy to new priorities, succession planning often becomes an important consideration that requires careful planning. Handing down your business to children, other family members, or trusted friends may be the preferred and desired outcome, but you will also need to navigate the potential tax liability that is likely to arise as a result of transferring your business. That’s where holdover relief can help and can make the process of passing on your business far less of a tax burden.

What tax do I have to pay when I pass on my business?

Your business is a valuable asset and therefore will be subject to Capital Gains Tax (CGT). CGT is due on the disposal of assets where they have increased in value from when you first acquired them. This is certainly likely to be the case when it comes to your business because you will need to consider its value from when you first set it up or took hold of the reins and its current market value at the time you decide to gift it to someone else. Even if you are not transferring your business by way of a sale where you would receive the physical monetary gain, CGT is still triggered when gifting an asset because the gain is seen to be gifted to the recipient as well.

How much capital gains tax do I have to pay when I pass on my business?

CGT is calculated only on the increase in value and not the entirety of the new value. Nevertheless, if you’ve started a business from scratch then this can potentially mean the same thing. We’ve provided a few examples to illustrate further:

Example 1: A sole trader business you’ve started from scratch

You own a carpentry business which you run as a sole trader and started from scratch. After 40 years you decide you want to retire early and pass it down to your nephew. As a well-established business now, it is valued at £40,000. The entire £40,000 would be subject to CGT as it would have originally been valued at £0 when you first started.

However, you are able to reduce this by utilising your annual CGT allowance so long as you have not claimed the full amount on any other disposals made in the tax year. For 2024/25 the CGT allowance is £3,000. Furthermore, you can reduce your CGT liability further by deducting any allowable costs such as fees you might have had to pay for the valuation of the business and legal fees to transfer ownership. Say these were £2,000 in total. 

To calculate how much CGT you will need to pay, you need to apply the relevant CGT rate band to your taxable gain. Your business does not include any residential property, and you are a higher rate taxpayer which means the CGT rate is 20%. Your taxable gain is £40,000 – £3,000 (CGT allowance) – £2,000 (allowable costs) which is £35,000. 20% of £35,000 is £7,000 which is how much you would have to pay in CGT.

Example 2: A limited company business you started from scratch

You own an IT support company which you incorporated 10 years ago. You now decide you want to explore a new direction in life and so hand it over to a trusted friend. Your business is valued at £18,000 and you started it up at £100 for 100 shares (a common practice for most small business owners setting up a new limited company).

In addition to your CGT allowance and allowable costs (let’s keep this at £2,000 for valuation and legal fees), you can also deduct your initial investment of £100 meaning your taxable gain is £12,900.

Again, your business does not include any residential property, and you are a higher rate taxpayer which means you need to apply the 20% CGT rate. 20% of £12,900 is £2,580 which is how much you would have to pay in CGT.

Example 3: A limited company you inherited

Your parents owned an antique appraisal company which you inherited. It was valued at £9,500 when you received it but after 3 years, you’ve decided to pursue your own passions and want to pass it over to your sibling. You’ve digitised and improved the efficiency of the business making the company more profitable. It has now grown in value to £14,500.

CGT is only applicable to the gain and not the entire £14,500. Your taxable gain is therefore £5,000. Once you deduct your allowable costs (keeping it at £2,000 for this example as well) the remaining taxable gain is fully covered by your annual CGT allowance. You would therefore have no CGT to pay on this transfer.

So, what is holdover relief?

Holdover relief is also sometimes referred to as ‘gift hold-over relief’. It is tax relief that is specifically intended to help business owners who want to pass on their business assets as a gift to trusted custodians rather than close down their business or sell (selling a business may not always be a feasible option where you cannot find a suitable buyer).

Who can use holdover relief?

You’re able to use holdover relief where you want to give your business to another individual. This means that irrespective of whether you own a business as a sole trader, as part of a partnership, or a limited company, you can use holdover relief when transferring eligible business assets. Although you can gift your shares of your limited company to another, limited companies themselves as a legal entity cannot use holdover relief when giving away business assets because they are not subject to CGT and are instead subject to corporation tax.

The recipient of the gift must be a UK tax resident at the time in which they receive the gift. If they no longer continue to be a UK resident within 6 years of receiving the assets, then CGT becomes immediately chargeable. Should the recipient be unable to pay the tax due, HMRC may seek to recover the tax due from the original donor where possible.

How does holdover relief work?

Claiming holdover relief enables you to pay no CGT on any taxable gain where you transfer business assets to another for free or very little consideration. Instead, what happens is that you effectively defer your taxable gain onto the recipient of your gift, and they take on the original base cost of the asset should they later sell it in the future.

As an example, to explain how holdover relief works, let’s say you bought a restaurant for £110,000 20 years ago. Now you are passing your business onto your child and the restaurant is worth £135,000. You elect to use holdover relief so pay no CGT on the £25,000 taxable gain. After 10 more years, your child decides they want to sell the restaurant, and it is worth £145,000.

Once again, there is a taxable gain so they will attract a CGT liability. However, the taxable gain is not calculated as the difference between its current market value and the market value of the restaurant at the time you transferred it over to them (as would have been the case had you have sold the restaurant to your child).

Instead, it will be calculated on the difference between the current market value and the original market value that you first acquired it for. Your child’s taxable gain is therefore worked out as £145,000 – £110,000 = £35,000. They essentially absorb your taxable gain as well as continue to be liable for their own.

However, should they continue to run the business and further down the line wish to pass on the family business to their own children, they would be able to use holdover relief once again and continue to defer the taxable gain until the business is sold.

What qualifies as a business asset for holdover relief?

A business asset will qualify for holdover relief so long as it is something that has been used for the purpose of business trading. This can include anything from property (such as a café), to land (such as a car park), to plant and machinery (such as refrigerators). There is an important distinction however, between trading businesses and investment businesses. Assets held by investment businesses will not qualify for holdover relief such as if you ran a company that held rental property.

Shares in a company can also qualify so long as it’s for your personal company (one in which you hold at least 5% of the voting rights) or a company that is not listed on any recognised stock exchange. Again however, it must be a trading company rather than a non-trading investment company in order for the shares to qualify. Agricultural land can qualify for holdover relief too so long as it meets the same conditions as those that define agricultural land for inheritance tax purposes. The land can be farmland, pastureland, woodlands, orchards, vineyards, or nurseries but should be used for the purpose of growing crops, rearing animals, and other related agricultural functions. Agricultural property such as cottages, barns and other structures can qualify so long as they are integral to the agricultural operations. However, land that has been repurposed for non-agricultural use such as equestrian schools, camp sites, or parkland may lose their eligibility for holdover relief.

How is holdover relief different from other CGT relief for business assets?

If you’ve been thinking about passing on your business, then it’s likely that you’ll have considered other options when it comes to succession planning. There are various different tax reliefs available when transferring a business, but each will have a specific intended purpose. We’ve summarised the key tax reliefs for business transfers and explain in what instances they’re best used:

Tax Relief	Relevant Tax	Purpose	Benefit
Holdover Relief	CGT	Defers CGT on gifted business assets	Allows donor to avoid immediate tax liability and defers until recipient disposes by way of sale
Rollover Relief	CGT	Defers CGT on reinvested business asset proceeds	Preserves cash flow by deferring tax until disposal of the replacement asset
Business Assets Disposal Relief	CGT	Reduces CGT rate to 10% on qualifying business asset disposals	Significantly reduces the CGT liability, allowing you to retain more of the proceeds
Incorporation Relief	CGT	Defers CGT when assets are transferred from sole tradership into limited company	Allows incorporation without an immediate CGT charge
Business Relief	IHT	Reduces taxable value of assets by 50% or 100% for inheritance tax purposes	Reduces or removes inheritance tax liability on business transfers made upon death

How to claim holdover relief

Unlike some tax reliefs which are automatically applied, holdover relief must be actively claimed for. This can be done through completing the HS295 form and submitted alongside the donor’s self assessment tax return. However, to complete the form, you must jointly elect to claim holdover relief with the recipient of your gift as they must agree to take on the future tax liability of the business assets.

Holdover relief must be claimed within 4 years after the end of the tax year in which the transfer occurred. This means that if you hand down your business to your child on 10 June 2023, you need to have made a claim by 5April 2028. 

Get help with holdover relief

Passing on your business legacy is so important that it only makes sense to ensure it’s done correctly. If you’re making plans to hand down your business and need help understanding the potential tax liabilities as well as available tax reliefs, then please do contact us. We’ll be able to support you by helping you completing your capital gains tax return, ensuring you’re utilising the most efficient route to achieve your desired outcomes.