Holdover Relief Trust to Gift Family Assets Whilst Deferring CGT

A Holdover Relief Trust is a trust that you set up in life and is an effective tool to make gifts of assets that are usually subject to capital gains tax on disposal of gifting such as holiday home and additional property.

For Example:

Mr & Mrs Smith have 2 adult children and 4 grandchildren.

• They own their main residence, other properties such as a holiday home and a buy to let property.
• All properties have increased in value meaning that if they sell or give away the holiday home or investment property, capital gains tax (CGT) may be payable.
• They also have other savings and investments.
• Some investments have made gains that would also be subject to CGT if they sell or transfer them to their children.

Mr and Mrs Smith want to start the 7-year inheritance tax (IHT) gifting clock ‘ticking’ before they get too old as any gifts will fall outside the estate for IHT if they survive for 7 years.

• The problem is that if they gift investment property or investments to children, CGT will be payable.
• The other problem is that if they gift investment property or investments to children and their children then get divorced, any assets gifted to them will be included in any financial settlement.

The Solution:  Family Gift Holdover Relief Trust

• Mr and Mrs Smith both gift a share of assets to a “no settlor interested trust”
• This means the trust must exclude both the settlers (i.e., Mr & Mrs Smith) and their ‘minor children’ (i.e., children below aged 18) must be excluded from benefitting in any way from the trust.
• This also means their adult children can benefit from the trust.
• They gift both the Holiday Home and the Rental Property to the trust.  CGT would usually be payable but
• They complete a HMRC HS295 Claim Form for CGT Holdover Relief.
• This means that CGT is postponed until a property is sold by the trust.
• Their adult children and the grandchildren can now enjoy the use of the holiday home if they choose too.
• Their adult children and the grandchildren can now enjoy the rental profit (after 45% income taxes paid by the trust) by letting the holiday home or the other property if they choose too.
• It may therefore be that adult children or even the grandchildren keep using the holiday home for holidays or move into it permanently and/or stop letting the rental property out and live in that property themselves rent free meaning no income taxes paid by the trust.

Remember, CGT has only been deferred, it is still building up based upon the original acquisition costs by Mr and Mrs Smith, so children/grandchildren should consider never selling and pass property on as a legacy for future generations (assuming the trust wording allows for this) or wait until CGT rates and allowances are lower (if ever) in the future.

Result of Family Gift Holdover Relief Trust Solution

• Assets are inheritance tax free after 7 years.
• The children’s estate and subsequently their bloodlines estates will not be subject to inheritance taxes on wealth that you have left in the ‘holdover relief trust’ that they subsequently have access too.  This may mean lower inheritance tax bills for future generations.
• Assets have been protected from divorce settlements for future generations.
• Asset may also protected from any care fees means test.

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