As discussed in the Basic calculation principles of capital gains tax guidance note, a gift of a chargeable asset is a disposal for capital gains tax (CGT) purposes. To calculate the transferor’s capital gain, the deemed sales proceeds are equal to the market value of the asset at the date of the gift. This rule applies whether or not the transferor and the transferee are ‘connected persons’, as defined in the Basic calculation principles of capital gains tax guidance note. TCGA 1992, s 17
The transferee’s base cost is the deemed proceeds (ie market value) at the date of the gift.
This means the transferor may have CGT to pay even though he has received no money from the transferee. Also, the transferee has an elevated base cost which he has not actually paid.
To mitigate this cash flow problem, business asset gift relief (also known as gift relief or hold-over relief) can be claimed on the gift of qualifying business assets. Gift relief operates to defer the gain by rolling over this capital gain against the base cost of the asset in the hands of the transferee. Essentially the relief ensures the transferor’s capital gain is passed to the transferee.
Not all gifts qualify for gift relief. Sometimes the transferor will be left with a CGT liability even though he has received no cash proceeds. However, where gift relief is not available or is not claimed, the transferor may be able to pay the tax due by instalments. This is discussed in the Business asset gift relief ― restrictions guidance note.
For a discussion of gift relief in the context of incorporation, see Incorporation of a business.
The conditions for relief explained below are summarised in the Flowchart ― business asset gift relief.