Gift of unquoted trading company shares: hold-over relief and donee's base cost (TCGA 1992 s.165)
In 2026/27 Bernard gives his daughter Lowri ordinary shares in Tidemill Joinery Ltd, an unquoted trading company. The shares have a market value of £300,000 at the date of the gift, and Bernard's allowable base cost is £50,000. Bernard and Lowri both sign a claim for gift relief under s.165 Taxation of Chargeable Gains Act 1992. Ignore the annual exempt amount and any other relief.
What is the capital gains tax effect of the gift and the claim?
Choose one answer to see the reasoning.
Worked answer
Correct answer E: No gain is charged on Bernard now; Lowri's base cost is reduced to £50,000, so the held-over gain is taxed when she disposes of the shares.
THE RULE TO REMEMBER
On a gift of qualifying business assets, including unlisted trading company shares, a s.165 claim reduces both the donor's gain and the donee's base cost by the held-over gain.
Gift of unquoted trading company shares: hold-over relief and donee's base cost (TCGA 1992 s.165)
A gift between connected persons is treated as a disposal at market value, so without relief Bernard would have a gain of £250,000 (£300,000 less £50,000). Section 165 TCGA 1992 allows gift relief where an individual disposes of an asset otherwise than at arm's length, and the asset falls within s.165(2). This includes shares in a trading company that are not listed on a recognised stock exchange (s.165(2)(b)). Tidemill Joinery Ltd's shares qualify, and Bernard and Lowri have made the required joint claim. Under s.165(4), Bernard's gain and Lowri's acquisition cost are each reduced by the held-over gain of £250,000. Bernard's chargeable gain is therefore nil, and Lowri's base cost is £300,000 less £250,000, which is £50,000. The gain is deferred, not removed, and will come into charge when Lowri disposes of the shares.
Why A is wrong: With a valid joint claim, s.165(4) reduces Bernard's gain to nil rather than charging it now.
Why B is wrong: Section 165(4) reduces the donee's acquisition cost by the held-over gain, so Lowri does not take the shares at market value.
Why C is wrong: The held-over gain passes to Lowri through her reduced base cost; it is not postponed until Bernard's death.
Why D is wrong: Section 165(2)(b) covers unlisted trading company shares regardless of whether the donee works for the company.
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