Holdover Relief and Trusts – What’s The Big Deal?

As a Private Client Lawyer, I am frequently asked about putting property into trust – whether for inheritance tax planning, protecting assets for future generations, or ensuring control over how a property is managed. However, one key tax issue that many people overlook is Capital Gains Tax (CGT), which can arise when gifting property into a trust.

Surprisingly, very few people have even heard of Holdover Relief, a valuable tax relief that can help defer CGT when transferring assets into trust – for example, a rental property. Without it, you could face a significant tax bill even though you’re not selling the property or receiving any money for it. This often comes as a shock to clients who assume that gifting a property is tax-free.

In this article, I’ll explain what Holdover Relief is, when it applies, and how it works in practice when transferring a rental property into a trust – so you can make informed decisions and avoid unexpected tax liabilities.

If you have any questions about Holdover Relief or trusts or would like to talk to a trusts specialist, please get in touch today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.

What is Holdover Relief?

Holdover Relief (also called “gift relief”) is a CGT relief that allows you to defer paying tax when you pass certain assets, including rental properties, to a trust. Instead of being taxed at the time of the gift, the capital gain is “held over,” meaning the person receiving the asset takes on the original acquisition cost and any built-up gain.

This means that while you, as the donor, won’t immediately pay CGT, the recipient (in this case, the trustees of the trust) will eventually pay tax when they sell the asset.

Why is Holdover Relief important?

If Holdover Relief was not available, you could face a large CGT bill when gifting a rental property into a trust, even though you aren’t receiving any money for it. As a higher-rate taxpayer, the CGT rate for most assets – including rental properties – is currently 24%.

For example, if you originally bought a rental property for £150,000 and it is now worth £500,000, the capital gain would be £350,000. If Holdover Relief was not available, and you transferred the property into a trust, you could face a CGT bill of:

£350,000 x 24% = £84,000.

By claiming Holdover Relief, this CGT liability is deferred, and instead, the trust takes over your acquisition cost (£150,000). When the trustees later sell the property, the tax will then be payable based on the gain made from the original purchase price.

When can you claim Holdover Relief?

Holdover Relief is not automatic; you must apply for it. You can claim Holdover Relief when gifting assets into most types of trusts, such as a discretionary trust or life interest trust (but not bare trusts).

However, Holdover Relief is not available if you sell the asset for full market value, or if you receive any form of payment in return.

How do you claim Holdover Relief?

To claim Holdover Relief, you and the trustees must complete HMRC form HS295 (Gift Hold-Over Relief claim form) and submit it to HMRC. This form includes details of the asset, the parties involved, and confirmation that both the donor and recipient agree to defer the gain.

Once the claim is approved, the gain is effectively transferred to the trustees, and they will be responsible for the CGT when they eventually dispose of the asset.

Potential risks and considerations

While Holdover Relief is a useful tool for estate planning, there are a few important factors to keep in mind if you are looking at putting a property into trust:

1. CGT is Only Deferred, Not Avoided

• The tax liability is passed on to the trust, which may have to pay CGT when the property is sold in the future.
• If property prices continue to rise, the gain (and therefore the tax payable) could be even higher.

2. Inheritance Tax (IHT) Implications

• Gifting property into a trust is what is known as an “immediately chargeable lifetime transfer” for IHT purposes. This means that, if the value of the property exceeds the tax threshold (currently £325,000), a 20% IHT charge on the excess will apply at the time of the transfer. For example, if you are transferring a property into trust that is worth £425,000, you would have to pay IHT of £20,000 to HMRC when you set up the trust.
• If you survive for seven years from the date of the transfer, the gift should fall outside your estate for IHT purposes.

3. Trustees’ Future Tax Liability

• When the trustees later dispose of the property, they will pay CGT based on the original purchase price you paid.
• The trustees will be taxed at the trust rate of CGT (currently 24%).

4. Complexity and Costs

• Trusts involve ongoing administrative and legal costs, but the benefits of holding assets in trust usually outweigh the administrative tasks.
• The trustees must file annual tax returns, report income from rental properties, and handle compliance obligations. However, there are professionals who can help with these responsibilities and it doesn’t need to cost an arm and a leg if you choose the right people to help you.

Example of Holdover Relief in action

Scenario: Transferring a Rental Property into a Discretionary Trust

Hazel owns a rental property that she originally purchased for £200,000. It is now worth £600,000, meaning there is a potential capital gain of £400,000. Hazel is a higher-rate taxpayer and wants to place the property into a discretionary trust for her children.

Without Holdover Relief

• Hazel would be taxed as if she had sold the property for £600,000.
• The gain of £400,000 would be taxed at 24%.
• This would result in an immediate CGT bill of £96,000.

With Holdover Relief

• The CGT is held over, so Hazel does not pay any tax at the time of transfer.
• The trust takes on Hazel’s original acquisition cost (£200,000).
• When the trustees sell the property in the future, they will pay CGT based on the increase from £200,000.

By using Holdover Relief, Hazel avoids an immediate tax bill, and the CGT is deferred until the trust disposes of the property.

Final thoughts

Holdover Relief can be a powerful tax-planning tool when transferring properties into trust, helping to defer CGT and improve tax efficiency.

However, it is essential to consider the long-term tax implications, including future CGT and potential IHT charges.

If you are thinking about transferring a property into a trust, professional legal and tax advice is crucial to ensure you comply with all tax regulations and make the most of available reliefs.

If you have any questions about Holdover Relief or trusts or would like to talk to a trusts specialist, please get in touch today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.