Welcome to this first article in our series on the tax ‘elephant traps’ that lie in wait for the unwary or inexperienced adviser. Let’s face it no adviser wants to get caught out, but how many times have you read a tax case or heard a tax horror story and the alarm bells started to ring?
I am going to start off with old fashioned gift relief (TCGA 1992, s 165). It has been around for a long time but it is a trip hazard.
Under s 165 shares in a private trading company can be gifted from one individual to another without giving rise to a CGT liability. The shares must be in a company that is either:
- not listed on any recognised stock exchange; or
- the transferor’s personal company i.e. a company in which the transferor can exercise at least 5% of the voting rights
The company’s main activities must be trading rather than non-trading activities such as investment.
So it seems fairly straight forward. However, relief under s 165 can be restricted by TCGA 1992, Sch 7 where the transferor had more than 25% of the voting rights at any time in the 12 months prior to the transfer or the company is the transferor’s personal company.
So what does this mean?
Where the company holds investments that are not part of the trade carried on by the company there will be a restriction in the amount of the gain that can be heldover.
Does it matter?
Yes. I spoke to an adviser whose client had all the papers ready to make a gift. The adviser called TaxDesk for a quick second opinion. His client had 100% of a large property trading company with £10m of stock properties. There was no doubt it was a trading company. The company also had a small investment property with a market value of £150,000. So not substantial in relation to the trading properties. However, the existence of this property meant that gift relief under s 165 was not available. A quick phone call saved a CGT charge on a gain of £millions! Also we advised him on how to extract the offending property so that gift relief could be claimed.
The way the rules work is that the value of the investment property is compared to the total chargeable assets of the company, meaning all the company’s assets which, if sold, would be dealt with under CGT rules (Para 7 Sch 7 TCGA 1992). The stock properties are not included so the restriction on holdover relief was 100%.
What about a case of your typical OMB with internally generated goodwill and perhaps a small investment property? For a company which was trading on 1 April 2002 its goodwill will be treated as a chargeable asset, whereas if the trade started after that date goodwill will be treated as an intangible asset (and not a chargeable asset) for corporation tax purposes (Part 8 CTA 2009). To illustrate this let’s assume that the investment property is worth £100,000, and the goodwill is worth £900,000, and the gain on the gift of shares is £500,000. If the trade started before 1 April 2002, 10% of the gain (or £50,000) would be denied gift relief. On the other hand, if the trade started after 1 April 2002 the company’s only chargeable asset is the investment property, so none of the gain is covered by gift relief. The full £500,000 would be chargeable to CGT.
If you require any further information in relation to gift relief or any related matters, please ring the TaxDesk on 0845 4900 509 and ask for Paula Tallon.