Holding period test

What it means

The holding period test is the condition that decides whether an individual’s income from selling certain assets is exempt from tax. What counts is how long the seller owned the asset before selling. If the period is longer than the law requires, the gain is not taxed; if it is shorter, the income is taxable.

It applies most often on the sale of property and the sale of securities. For property the period runs from acquisition, and for property inherited from a close relative the time the deceased owned it can sometimes be added.

The test applies only to assets not included in business assets. If a sole trader or company used the property in the business, the test is counted differently, usually only from its removal from business assets, and for companies the exemption does not apply at all.

How it works in practice

When a client is thinking of selling a flat, we first look at the acquisition date on the title deed extract or in the contract. Sometimes waiting a few weeks is enough for the sale to fall under the exemption, and the tax saved far exceeds any difference in price.

If the holding period test is not met, the income is declared in a type B tax return as other income. The acquisition cost and documented selling costs, such as the estate agent’s commission or registration fees, are deducted from it.

For securities the law adds further conditions, such as an annual cap on exempt income and whether the securities were held as business assets. When selling fund units or shares bought in several tranches, the sale must be matched to specific purchases.

What to watch out for

A common mistake is counting from the date of entry in the land register instead of the date the law treats as decisive for acquisition, or the other way round. For a property purchase it is usually the date the decision on registration becomes final. A few weeks’ difference can decide the whole tax.

An exemption does not mean nothing needs doing. If exempt income exceeds the amount set by law, it must be reported in the tax return in the section on exempt income even though no tax is paid on it. Leaving it out can lead to a fine.