How to Avoid a ‘Dry’ Tax Charge
Gifting assets might seem like a straightforward way to pass on wealth—but from a capital gains tax (CGT) perspective, it can create an unexpected problem.
You could end up with a tax bill without receiving any cash.
This is known as a “dry” tax charge.
Why gifts can trigger CGT
When you give away an asset (such as shares or property), HMRC generally applies the market value rule.
This means:
- You are treated as if you sold the asset at full market value
- Even if no money changes hands
As a result, a capital gain can arise, and CGT may be payable—even though you received nothing in return.
The solution: Gift (holdover) relief
The good news is that, in certain cases, gift relief (also known as holdover relief) can apply.
This relief is available on qualifying business assets, including:
- Assets used in a trade
- Shares in an unlisted trading company
If the conditions are met, the gain is:
Deferred (held over) rather than taxed immediately.
How holdover relief works
Instead of paying CGT now:
- The gain is deducted from the recipient’s base cost
- The recipient effectively “inherits” the gain
- CGT is only paid when the asset is eventually sold
This makes it a powerful tool for:
- Passing down family businesses
- Succession planning
- Reorganising business structures
It’s not just for gifts: Sales at undervalue
Despite the name, gift relief doesn’t only apply to outright gifts.
It can also apply where an asset is transferred at less than market value—known as a sale at undervalue.
How the relief is calculated
The amount of gain that can be held over depends on the transaction:
- Pure gift (no proceeds):
The full gain (based on market value) can be deferred - Sale at undervalue:
Only the excess of the gain over the actual proceeds can be held over
This distinction is important when structuring transactions.
A common planning scenario: Incorporating a business
One situation where this is often used is when a sole trader incorporates their business.
For example:
- Business assets are transferred to a company
- The company may pay some consideration (or not)
- Gift relief can be claimed to defer the CGT
This allows:
- Flexibility to extract funds later
- Without triggering an immediate CGT charge
The risk: Getting the valuation wrong
While this planning can be effective, there is a key risk.
If the sale proceeds are set too high, you could:
- Trigger an unexpected CGT liability
- Lose part of the available relief
Careful valuation and structuring are essential.
Practical tips for using gift relief
If you are considering gifting business assets:
- Confirm the asset qualifies for relief
- Ensure the recipient is eligible
- Document the market value properly
- Consider whether a full gift or partial sale is more appropriate
- Take advice before setting any consideration
Final thoughts
Gifting assets can be an effective way to pass on wealth—but without proper planning, it can create a tax charge with no cash to pay it.
Gift relief offers a valuable solution, but:
It must be applied correctly and carefully structured.
Need help with CGT planning or business transfers?
At Merranti Accounting, we help clients:
- Structure gifts and transfers tax-efficiently
- Claim available reliefs correctly
- Avoid unexpected CGT liabilities
