As they approach retirement, it is commonplace for SME company owners to bring in their adult children to take over the day to day running of the business. One way to do this is to appoint them as directors, while maintaining overall control of the share capital.
Another strategy would be for owners to hand over full control and exit the company altogether, gifting the shares to the children as well. This involves a transfer of value, i.e. the value of the shares being gifted but, thanks to business property relief, it is unlikely to trigger an Inheritance Tax (IHT) charge, unless the company is wholly or mainly carrying on investment-type activities (note that property-related businesses like caravan parks can be a grey area here). However, gift holdover relief can be an issue, as the transfer will be treated as taking place at market value.
What is gift holdover relief?
You may be able to claim Gift Hold-Over Relief if you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer.
Gift Hold-Over Relief means:
- you do not pay Capital Gains Tax when you give away the assets
- the person you give them to pays Capital Gains tax (if any is due) when they sell (or ‘dispose of’) them
Tax is not usually payable on gifts to your husband, wife, civil partner or a charity.
Why gift holdover relief may be a problem
In the absence of relief, the owner would be faced with a 'dry' CGT charge (i.e., there are no proceeds from which to pay the tax on the gifted asset). However, holdover relief under s. 165 TCGA 1992 can be jointly claimed by the transferor and the transferees. This effectively rolls the gain up into the base cost of the shares in the hands of the recipients, and so it will not be taxed until the shares are disposed of later. If the children pass on the shares to their own children, the process can be repeated.
Anti-avoidance
Gains on shares, even in UK-based companies, are only taxable if the person making the disposal is a UK resident at the time of the disposal (subject to certain rules for temporary periods of non-residence). As a result, it would seem relatively simple to make a gift of the shares and for the recipient leave the country before making a disposal of them.
To combat this situation, there is a restriction on s.165 relief where the transferee becomes non-resident within six years of the end of the tax year in which they received the shares. If this happens, the held over gain becomes taxable, and if the transferee doesn't pay the tax due, HMRC are entitled to recover it from the transferor, i.e., the original shareholder.
There may, of course be genuine reasons for becoming non-resident, but in most cases the motive won't make a difference to the clawback of relief. The only potential get out is if the non-residence is to work overseas for no more than three years. It is advisable to inform HMRC of the intention prior to the relocation to avoid a CGT charge being assessed in the first place.
If you have any questions or would like advice on this topic, please drop me a line at beverley.howells@torgersens.com.
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