CGT Hold-Over Into A Family Trust Holding Trading Company Shares
- Atlas Tax
- 5 days ago
- 13 min read
CGT Hold-Over Into a Family Trust Holding Trading Company Shares in the UK
Settling shares in an unquoted trading company into a discretionary family trust triggers a deemed disposal at market value for Capital Gains Tax purposes. Without a holdover claim, the CGT on an unrealised gain can be substantial, and paying it on a gift where no cash changes hands represents exactly the kind of dry charge the holdover provisions were designed to prevent. With a valid joint claim, the gain is deferred into the trustees' base cost and no CGT is payable at the point of settlement.
The claim for shares settled into a discretionary trust is made under section 260 of the Taxation of Chargeable Gains Act 1992, not section 165, and that distinction carries significant practical consequences.
Which Section of TCGA 1992 Applies When You Settle Shares Into a Family Trust?
Section 165 applies to gifts of business assets. Section 260 applies to gifts of business and non-business assets that are transfers immediately chargeable to Inheritance Tax.
A gift of shares into a discretionary family trust is a chargeable lifetime transfer for IHT purposes, whether or not any IHT is actually payable after reliefs. That IHT status is what activates section 260. Since the settlement of shares into a discretionary trust is a CLT, section 260 applies as the primary provision.
Should both provisions be applicable, relief under s.260 shall take priority. For shares in an unquoted trading company settled into a discretionary trust, both section 165 and section 260 could technically apply. In practice, section 260 governs the claim.
The Less-Noticed Advantage of s.260 Over s.165
This is the aspect most articles on this subject either miss entirely or understate. When gifts of shares in a trading company are considered, there are two restrictions that impact relief claimed under s.165. It is important to highlight that these restrictions do not apply when considering gift relief under TCGA 1992 s.260 for transfers into and out of a trust.
The first restriction under section 165 relates to the definition of a qualifying trading company. The second is the proportional restriction that applies where the company holds investment or non-trading assets alongside its trading activities. Under section 165, where a company's assets are partly trading and partly non-trading, the holdover claim is restricted proportionally to the trading asset fraction. A company whose assets are 75% trading and 25% investment property or surplus cash would only support a holdover claim of 75% of the accrued gain under section 165.
Under section 260, this restriction does not apply. The holdover covers the full gain, regardless of the company's asset mix, provided the transfer is a valid CLT and the other conditions are met.
For a family business owner in Greater Manchester, where many established manufacturing, construction supply, or professional services companies have accumulated retained cash or hold investment assets alongside their trading operations, this distinction can mean the difference between a full holdover and a materially restricted one. Settling into a discretionary trust via section 260 removes the asset-mix problem entirely.
The Conditions That Must Be Met
The Settlor-Interested Trust Restriction
This is the condition that, if overlooked, renders the holdover unavailable and triggers a CGT charge with no remedy other than reversing the transaction, which itself has tax consequences.
Section 169C of TCGA 1992 denies holdover relief under section 260 where the trust is settlor-interested at the time of the settlement. A trust is settlor-interested if the settlor, their spouse or civil partner, or any of their minor children can benefit from the trust property. The restriction applies to direct or indirect benefit, and it catches contingent interests as well as vested ones.
The practical implication is that the settlor and their family must be excluded from the class of beneficiaries at the date of the gift. A discretionary trust deed drawn in favour of "the settlor's children and remoter descendants" is sufficient if the settlor themselves and their spouse are excluded. Including them, even as a residual or safety-net beneficiary in case the trust fund cannot be distributed to other beneficiaries, defeats the holdover claim.
Where the trust was set up correctly but later becomes settlor-interested (perhaps because the settlor's adult child receives a benefit that is then lent back to the settlor informally), the position for the original settlement should be unaffected, but care is needed to ensure ongoing holdover claims from the trust remain valid.
Non-Resident Trustees
Relief under TCGA 1992 s.260 is not available where the transferee is not resident in the UK. Where the trustees of the family trust are non-UK resident, or the trust is itself non-UK resident under the test in TCGA 1992, holdover is denied. This catches offshore trust arrangements and situations where a professional trustee has moved or re-registered outside the UK. The trustee residency must be confirmed before the transfer is executed, not assumed.
The Trading Company Condition
For a section 260 claim, the nature of the underlying asset does not technically need to meet any trading company test (since section 260 applies to any CLT regardless of asset type). However, where BPR is being relied upon to eliminate the IHT entry charge on the CLT, the company does need to satisfy the BPR trading company condition independently. If BPR is not claimed, the IHT charge may still arise on the CLT if the value exceeds the available nil rate band, and the CGT holdover under section 260 still applies. The two questions, whether CGT holdover is available and whether BPR reduces the IHT, are assessed separately.
The IHT Position Alongside CGT Holdover
BPR and the £2.5 Million Allowance From April 2026
From 6 April 2026, Business Property Relief applies at 100% on the first £2.5 million of qualifying business property per individual, with 50% relief on amounts above that cap. For a business owner settling shares in a qualifying unquoted trading company into a family trust, the combination of 100% BPR and section 260 CGT holdover can mean that the settlement produces no immediate IHT charge and no immediate CGT charge, with the shares moved outside the estate.
BPR applies to unquoted shares in a qualifying trading company where the shares have been owned for at least two years before the transfer. The company must be trading, not investment-focused. Where those conditions are met and the total value settled is within the £2.5 million per-person BPR cap, the CLT entry charge for IHT purposes is reduced to nil by BPR, and section 260 holdover removes the CGT.
Changes to IHT business and agricultural reliefs planned from 6 April 2026 have prompted many individuals and their advisers to consider the potential tax advantages of giving away assets to a trust during their lifetime, rather than on death. The attraction is clear: settling before values grow further, locking in the current BPR position, and deferring CGT through holdover.
The Nil Rate Band as a Safety Net
Where BPR does not apply to the full CLT value, or where the shares do not qualify at all, the nil rate band of £325,000 for 2026/27 provides protection against the 20% IHT entry charge up to that amount. A CLT within the available nil rate band produces no IHT entry charge. The CGT holdover under section 260 is still available, because the transfer is still an IHT chargeable event, it is simply covered by the nil rate band exemption. S.260 holdover relief applies to transfers that are immediately chargeable to IHT, or would be but for an exemption or the IHT Nil Rate Band.
A Worked Example: Settling Shares Worth £600,000
A sole director of a Bolton-based engineering company holds 100% of the shares, which were acquired for £50,000 ten years ago and are now worth £600,000. The accrued gain is therefore £550,000. He has made no prior chargeable lifetime transfers and has a full nil rate band of £325,000 available.
He settles all the shares into a discretionary trust for the benefit of his adult children, excluding himself and his wife from benefit. His wife is also excluded from benefit to avoid the settlor-interested restriction.
IHT: The settlement is a CLT of £600,000. The nil rate band covers £325,000. The BPR analysis: shares in an unquoted trading company, held for more than two years, qualifies for 100% BPR. BPR covers the full £600,000. Net IHT entry charge: nil.
CGT: The deemed disposal at market value of £600,000 produces a gain of £550,000. A joint holdover claim is made under section 260, as the transfer is a CLT. The held-over gain reduces the trustees' base cost to £50,000. No CGT arises at settlement.
Result: shares have transferred into trust with no immediate IHT or CGT. The director's estate has been reduced by £600,000 of growth assets. The trust will be subject to a 10-year periodic charge, calculated on the trust fund's value at that anniversary above the available nil rate band, at a maximum effective rate of 6%. BPR will apply at the periodic charge date to the extent the shares in the trust still qualify.
If the director survives seven years from the settlement, the CLT drops out of cumulative chargeable transfers entirely, freeing up the nil rate band for future transfers.
What Happens to the Deferred Gain Inside the Trust
Trustees' Base Cost
The trustees take on the shares at a base cost of £50,000, not £600,000. The gain which would have accrued to the transferor is effectively transferred to the transferee who will pay CGT on it when the asset is disposed of. When the trustees eventually sell the shares, they will compute their gain from the £50,000 base cost. At that point, trust CGT rates apply: 24% for the 2026/27 tax year on non-residential gains, with a trust annual exempt amount of £1,500 (shared equally among all trusts created by the same settlor, where there are multiple trusts).
This held-over base cost is a material liability sitting within the trust fund. The trust's realistic net asset value, from a tax planning perspective, is not £600,000 but something lower reflecting the CGT that would arise if the shares were sold. This should inform any distribution planning or restructuring the trustees undertake.
Holdover Again on Exit From the Trust
When the trustees distribute the shares to a beneficiary, that distribution is itself a disposal by the trustees at market value, and a further CGT charge on the accumulated gain (from the original £50,000 base cost to the then-current value) would normally arise. A second holdover can be claimed under section 260 on the distribution from the trust, provided the distribution creates an IHT exit charge, and provided the trust is a relevant property trust, which a discretionary trust is. The beneficiary then carries the same held-over base cost into their hands, deferring CGT further.
The exit charge itself is a fraction of the maximum periodic charge rate, calculated by reference to the number of complete quarters elapsed since the last 10-year anniversary. Where the exit charge is very small or nil, the IHT cost of distributing is negligible, but section 260 holdover remains available provided the IHT event (even at a nil rate) occurs.
Making the Holdover Claim
The claim is made using HMRC form HS295. Both the transferor (the shareholder) and the trustees must sign the form. The claim form requires confirmation that the disposal was a chargeable transfer, but not a Potentially Exempt Transfer, for Inheritance Tax purposes. The form must be submitted within four years of the end of the tax year in which the disposal takes place. For a settlement made in November 2026, the relevant tax year ends 5 April 2027, giving a submission deadline of 5 April 2031.
The form requires details of the asset transferred, the market value agreed for the transfer, the base cost, and the held-over gain. Where the market value of unquoted shares is not straightforwardly ascertainable, the form includes an option to apply for deferment of valuations while HMRC's Shares and Assets Valuation team works through the position. In practice, obtaining a professional valuation before the settlement and having HMRC agree it provides more certainty, though some practitioners prefer to settle and then work the valuation through the holdover claim process.
Key Takeaways
When shares in an unquoted trading company are settled into a discretionary family trust, the CGT holdover claim is made under section 260 TCGA 1992 (not section 165), because the settlement is a chargeable lifetime transfer for IHT purposes.
Where both provisions could apply, relief under s.260 shall take priority.
Section 260 holdover is not subject to the proportional restriction that applies under section 165 where the company holds non-trading assets. This makes the trust route more effective than a direct gift to an individual where the company has accumulated cash or investment assets.
The holdover is denied entirely where the trust is settlor-interested at the date of settlement. The settlor and their spouse must be excluded from benefit.
The holdover is denied where the trustees are non-UK resident at the time of the transfer.
From 6 April 2026, 100% BPR applies to the first £2.5 million of qualifying unquoted trading company shares. Where BPR eliminates the IHT entry charge and section 260 holdover eliminates the CGT, a well-structured settlement can achieve both objectives with no immediate tax cost on either front.
The deferred gain is not eliminated: it passes to the trustees at a reduced base cost, and will crystallise when the trustees dispose of the shares, or can be held over further when distributing the shares to beneficiaries.
FAQs
Q1: What are the main differences between using section 165 and section 260 hold-over relief when transferring trading company shares into a family trust?
Well, in my experience advising business owners across the UK, this is one of those distinctions that catches many clients out at first. Section 165 generally applies to gifts of business assets, including unlisted shares in your personal trading company, and can work for transfers to individuals or certain trusts. Section 260, on the other hand, kicks in more readily for gifts into relevant property trusts (like most discretionary family trusts) where there's a chargeable transfer for Inheritance Tax purposes. The practical takeaway is that s260 often allows fuller deferral into trusts without some of the business asset restrictions, but you need to ensure the trust isn't settlor-interested. I've seen a Manchester manufacturer save a substantial bill by routing through the right section after we double-checked the trust deed. Always map it against your specific structure.
Q2: How does the presence of non-trading assets in the company affect the amount of hold-over relief available on shares gifted to a family trust?
It's worth noting that this is a common pitfall I encounter with clients who have diversified their company holdings. Hold-over relief can be restricted where the trading company owns chargeable non-business assets (like investment properties or surplus cash invested elsewhere) that would generate gains if sold. The relief is scaled back proportionally, so you might only defer part of the gain. Consider a family business owner in Leeds whose company had a rental flat tucked away – after valuation adjustments, only about 70% of the gain on the shares qualified fully. Getting a professional valuation early and perhaps reorganising assets beforehand can make a real difference.
Q3: Can hold-over relief still apply if the family trust later appoints the shares out to beneficiaries, and what should one watch for?
In practice, yes – further hold-over can often be claimed on the onward transfer from trustees to family beneficiaries, which is great for succession planning. However, the timing and trust type matter enormously. I've advised Birmingham shop owners where the initial transfer into a discretionary trust worked smoothly, but the exit needed careful documentation to maintain relief and avoid unexpected CGT hits. The key is ensuring each step qualifies independently and keeping records watertight, as HMRC scrutinises these chains.
Q4: What happens with hold-over relief if the recipient trust or beneficiary becomes non-UK resident after the transfer?
This is an edge case that worries many high-net-worth families with international ties. Relief can be clawed back if the transferee (trust or individual) ceases UK residency within a set period, triggering the held-over gain. In my years of advising, I've seen a client with Australian family connections narrowly avoid issues by structuring with UK-resident trustees and clear migration clauses. It's not something to leave to chance – professional input on the trust deed is essential here.
Q5: Is it possible to claim partial hold-over relief when only some shares in the trading company are transferred into the family trust?
Absolutely, and this offers flexibility for phased planning. You don't have to gift everything at once; relief applies proportionally to the shares transferred, provided they meet the trading company and ownership tests (such as your 5% voting rights threshold). A self-employed client of mine in Edinburgh transferred 40% of his shares over a couple of years, using the relief each time while retaining control. Just be mindful of how this interacts with Business Asset Disposal Relief qualification on future disposals.
Q6: How do settlor-interested trusts impact eligibility for hold-over relief on trading company shares?
This is a frequent gotcha. Hold-over under s260 is generally not available if the trust is settlor-interested (where the settlor or spouse can benefit). I've had clients initially draft family trusts this way for flexibility, only to realise it blocked the CGT deferral. Switching to a non-settlor interested discretionary trust resolved it, but it required revisiting the IHT implications too. Always review beneficiary classes carefully with your adviser.
Q7: What practical steps should a business owner take if the company has both trading and investment activities when considering a hold-over into trust?
From advising numerous family firms, the "substantial extent" test for non-trading activities (often around 20% or more) is crucial. If investment activities creep up, relief can be limited or denied. One hypothetical: a Kent-based tech firm with growing patent licensing income restructured to separate investments before gifting shares – it preserved full relief. Regular reviews of the company's asset mix and activities, perhaps with management accounts, help avoid nasty surprises.
Q8: Does gifting shares to a family trust via hold-over affect Business Asset Disposal Relief (BADR) for the recipient later on?
Generally, it shouldn't preclude a future BADR claim by the trustees or beneficiaries, provided the qualifying conditions (like the 5% holding and trading status) continue to be met during the relevant ownership period. In my experience, this combination is powerful for family succession, but the clock on ownership periods restarts in some respects. I've seen it work well for second-generation owners taking over, but documentation of the held-over gain is vital for their future calculations.
Q9: Are there any special considerations for AIM-listed shares in a trading company when using hold-over relief into a family trust?
AIM shares are often treated as unlisted for these purposes, which is helpful as they can qualify under the trading company rules. However, it's not automatic – the company must still primarily trade, and your interest must satisfy the thresholds. A client with a growing AIM company in the South West successfully used this route, but we confirmed the status carefully. It's a useful option for many growth businesses, though valuations can be more complex.
Q10: What common pitfalls arise with the joint election process or timing when claiming hold-over relief for shares into a family trust?
The claim (usually via HS295) must be made within four years of the end of the tax year of the transfer, and for non-trust gifts it's joint. For trusts, the donor can often claim alone, which simplifies things. Pitfalls I've seen include missing deadlines after busy year-ends or incomplete forms leading to queries. One retail business owner nearly missed out due to delayed trustee signatures – building in buffer time and using a trusted accountant to handle the submission pays dividends. Always confirm your specific facts with HMRC guidance for your circumstances.
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