Tx notes fa22 Final

June 2023 to March 2024 exams
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Note 1
The shares being gifted represent a 20% interest in the company which have a value of £10 per 
share.
Note 2
The shares are £1 ordinary shares which were subscribed for at par, so the cost is £1 per share.
The gain that arises would be included in the net gains of the tax year from which the annual exempt 
amount would be deducted to derive the taxable gain. 
The question then arises as to what tax rate would apply? Shares in unquoted trading companies are 
a qualifying business asset for purposes of business asset disposal relief and as A owns the 
minimum required 5% shareholding and is an employee of the company, a claim for business asset 
disposal relief is available and will result in a 10% tax rate (up to £1m) being applied to the taxable 
amount of the gain.
There is however another RELIEF that is available where such an asset is GIFTed! Yes gift holdover 
relief is available to be claimed, jointly by A and V, as shares in an unquoted trading company are 
qualifying business assets for gift holdover relief purposes.
This would allow the entire gain to be deferred, such that the donor, A, would not now be chargeable 
and the daughter, V would be deemed to acquire the shares at a cost of £20,000 instead of a cost of 
£200,000.
Without gift holdover relief the shares would be deemed acquired by V at their open market value of 
£200,000. With gift holdover relief, that cost is reduced by the amount of the deferred gain 
(£180,000) and thus a cost to V of £20,000 would then apply.
The question could be made more interesting if the shares were sold at undervalue to V rather than 
being gifted outright. Let us now assume therefore that A sold the shares to V for £4 per share. How 
would that now change our answer?
For IHT purposes the transfer of value must now be re-computed as follows:
For CGT purposes the chargeable gain is still computed based on the open market value of the 
asset being gifted. The difference arises in the application of the gift holdover relief, if claimed. When 
a sale is made at undervalue the gift holdover relief is restricted by the extent that any actual 
proceeds (20,000 x £4) exceed cost, which part of the gain will remain chargeable on the donor.
 £
Before: 60,000 @ £25 per share =
1,500,000
After: 40,000 @ £15 per share =
(600,000)
Cash (20,000 @ £4 per share) =
(80,000)
Transfer of value
820,000
£
Disposal consideration (20,000 @ £ 10)
200,000 
Cost (20,000 @ £1)
(20,000)
180,000
Gift Relief
(120,000)
Chargeable Gain (80,000 – 20,000)
60,000

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