Whether it’s for inheritance tax planning, safeguarding assets for future generations, or maintaining control over how a property is managed, trusts can be incredibly useful. But there’s one tax issue that often catches people off guard: Capital Gains Tax (CGT).
Many people are surprised to learn that gifting property into a trust can trigger a CGT liability—even though no money changes hands. Fortunately, Holdover Relief offers a way to defer this tax, but it’s not widely known or understood.
In this article, I’ll break down what Holdover Relief is, when it applies, and how it works in practice—especially when transferring rental property into a trust. This will help you make informed decisions and avoid unexpected tax bills.
What is Holdover Relief?
Holdover Relief, also known as Gift Relief, is a Capital Gains Tax relief that allows you to defer paying CGT when transferring certain assets into a trust. It’s particularly relevant for assets that have appreciated significantly in value, such as rental properties.
Here’s how it works:
- When you gift an asset into a qualifying trust, the capital gain is not taxed immediately.
- Instead, the gain is “held over,” meaning the recipient (the trust) inherits your original acquisition cost.
- The CGT liability is deferred until the trust disposes of the asset in the future.
This relief is especially useful when you’re not receiving any payment for the asset and want to avoid a large upfront tax bill.
Why does Holdover Relief Matter?
Without Holdover Relief, gifting a property into a trust could result in a substantial CGT bill, even though you’re not selling the property or receiving any income from the transfer.
For higher-rate taxpayers, CGT on residential property is currently 24%. That means even a modest gain can result in a significant tax liability.
Example:
- Original purchase price: £150,000
- Current market value: £500,000
- Capital gain: £350,000
- CGT without relief: £350,000 × 24% = £84,000
This tax bill often comes as a shock to clients who assume that gifting is tax-free. With Holdover Relief, however, the trust takes on your original cost basis, and the CGT is only payable when the trustees sell the property.
When can you claim Holdover Relief?
Holdover Relief is available in specific circumstances and must be claimed—it’s not automatic.
You can claim Holdover Relief when:
- Gifting assets into discretionary trusts or interest-in-possession trusts
- The transfer is a gift, not a sale
- You receive no payment or consideration for the asset
You cannot claim Holdover Relief if:
- The asset is transferred into a bare trust
- You sell the asset for full market value
- You receive any form of compensation or payment
It’s important to structure the transfer correctly to ensure eligibility for the relief.
How do you claim Holdover Relief?
To claim Holdover Relief, both the donor and the trustees must jointly complete and submit HMRC Form HS295.
The form requires:
- Details of the asset being transferred
- Information about both parties involved
- Confirmation that both agree to defer the gain
Once submitted and accepted by HMRC:
- The gain is “held over”
- The trust assumes the original acquisition cost
- CGT is deferred until the trust sells the asset
It’s advisable to work with a solicitor or tax advisor to ensure the form is completed accurately and submitted on time.
Key Considerations and Risks
While Holdover Relief offers clear benefits, it’s not without its complexities. Here are some important factors to consider:
- CGT Is Deferred, Not Eliminated
- The tax liability doesn’t disappear—it’s simply postponed.
- The trust will pay CGT when it sells the property, based on the original purchase price.
- If property values continue to rise, the eventual gain (and tax) could be even higher.
- Inheritance Tax (IHT) Implications
- Transferring property into a trust is an immediately chargeable lifetime transfer for IHT purposes.
- If the property’s value exceeds the nil-rate band (£325,000), a 20% IHT charge applies on the excess.
- Example: Property worth £425,000 → £100,000 over threshold → IHT = £20,000
- If you survive seven years from the date of the transfer, the gift falls outside your estate for IHT purposes.
- Additional planning may be needed to manage IHT exposure, such as using exemptions or insurance.
- Trustees’ Future Tax Liability
- Trustees inherit the donor’s base cost and will pay CGT when they sell the property.
- Trusts are taxed at the trust rate of CGT, currently 24%.
- Trustees must also manage other tax obligations, such as income tax on rental income and annual reporting.
- Complexity and Costs
- Trusts involve ongoing legal and administrative responsibilities.
- Trustees must:
- File annual tax returns
- Report rental income
- Maintain proper records
- Professional support is often needed, but costs can be manageable with the right advisors.
Despite the complexity, the benefits of using trusts such as asset protection, control, and tax efficiency often outweigh the administrative burden.
Final thoughts
Holdover Relief is a valuable but underused tax planning tool. It can make a significant difference when transferring property into trust, especially for those with high-value rental properties.
However, it’s essential to:
- Understand the long-term tax implications
- Consider both CGT and IHT
- Ensure the trust is structured correctly
- Seek professional advice to navigate the process
If you’re thinking about placing property into a trust, we’re here to help. Our team can guide you through the legal and tax considerations and ensure you make the most of available reliefs.
📞 Call us on 03330 14 24 24
📧 Email hello@myprobatesolicitors.co.uk