References to legislation is to the Taxation of Chargeable Gains Act 1992 unless otherwise specified. For guidance on general gift relief under s165 TCGA 1992, please see my earlier TQOTW that can be found here.
There is a general requirement under s166 TCGA that gift relief is denied where the transferee is not resident in the UK. This is subject to the exception under s167A.
S167A was introduced from 6 April 2015, alongside non-resident capital gains tax (NRCGT) on UK residential property disposals. For disposals between 6 April 2015 and 5 April 2019, it was possible to consider gift relief for disposals of UK residential property interests to non-residents provided the conditions in s165 were met.
Finance Act 2019 brought about various changes to TCGA 1992, including the widening of the UK CGT net to capture direct and indirect disposals of UK land interests. Amendments were also made to s167A to extend the scope of possible gift relief for disposals to non-residents to include direct and indirect disposals of UK land interests.
HMRC guidance on this area may be misleading and could be read to suggest that the relief may be available on all gifts of land and property to non-UK residents, but this is not necessarily the case.
S167A would apply if the following criteria is met:
– The disposal is one which a claim under s165 could be made
– The asset disposed of falls within s1A(3)(b) or (c) and is made to a non resident
– Ignoring s165, a gain would accrue to the transferor
– Ignoring s165, if we were to assume that the disposal is a direct or indirect disposal by a non resident (whether or not it is actually), the gain would be a relevant gain
Essentially, there is relief potentially available where a subsequent disposal by the non-resident transferee would be within the UK tax net. The transferor could be either UK resident or a non-UK resident making a direct or indirect disposal of UK land.
It is important to note that the exception under s167A would still require conditions in s165 to be satisfied (s167A(1)), namely, the gifted asset still needs to be a qualifying business asset. We would need to establish how the client has used the residential property. For example, if the residential property was let out as a long-term rental, this would not satisfy the criteria for a gift relief claim as generally, this type of activity is not accepted as a trade (BIM22001). However, if the property satisfied the conditions to be a furnished holiday let, then gift relief can be considered (s241).
The effect of the relief
Where s167A applies, the way gift relief is implemented is slightly different to that where a ‘normal’ claim is made under s165. The transferor’s gain is still reduced by the amount of held-over gain, but the transferee receives it at open market value, albeit with a deferred gain.
The effect of a ‘normal’ holdover claim reduces the consideration that the transferee is deemed to have given and which becomes the base cost on a subsequent disposal. S167A(4) modifies this such that the held-over gain is ‘frozen’ and would crystalise and accrue, in addition to the gain or loss that actually accrues, on the subsequent disposal of the asset.
The amount of gain deferred
In an earlier version of CG66886 (archived), where a UK resident gifts a UK land interest to a non-resident, HMRC suggests that the quantum of the deferred gain should not include any gain before the gifted asset came within the scope of non-resident capital gains tax.
Whilst FA 2019 mostly changed the terminology in s167A from “the chargeable NRCGT gain” to “the relevant gain”, HMRC appears to have also changed their stance on the amount of gain that may be deferred.
In their current version of CG66886, their example of a UK resident gifting land to a non-resident, shows that the full amount of gain accruing to the UK resident may be deferred under s167A.
Although HMRC do not elaborate further on their change in stance or how exactly they have applied the legislation, it may be indicative of potential differences in interpretation, and you should be mindful of the risks when advising the client.
Gift relief is potentially available to the client here, it is not denied by reason of the son being non-UK resident. We would need to ensure that the conditions of s165 are fulfilled. One of the essential points to clarify with the client would be the use of the residential property to ensure that it is an asset that qualifies under s165.
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