CGT on gifting shares in the family trading company

A common scenario we get asked for assistance with is the passing on of the family trading company to the next generation by way of a gift of shares.

In this month’s newsletter we are covering potential inheritance tax and capital gains tax pitfalls to be aware of, and this article focusses on the capital gains tax (‘CGT’) perspective.

A gift of an asset to a relative is deemed to be a disposal at market value for CGT purposes. However, where the asset in question consists of shares in an unquoted trading company then business asset gift relief can be claimed by an election between the transferor and transferee. The effect of that election is that the transferee then inherits the transferor’s base cost for tax purposes, and the deemed gain that would have arisen for the transferor is instead deferred until the transferee sells the shares.

To meet the definition of a trading company (or trading group), it must undertake activities which overall do not to a “substantial” extent consist of non-trading activities. HMRC interpret the meaning of substantial in this context to mean 20% and activities of a company (or group) should be judged “in the round”, taking account of factors including assets, income, profits and allocation of management time.

Assuming that a company (or group) has had its activities reviewed and is considered to satisfy this requirement then business asset gift relief should apply.

However, the legislation contains a restriction to the relief that can be claimed where companies (or groups) have chargeable assets which are “non-business” assets. Non-business in this context is taken to mean “non-trading” and, therefore, investment properties would be a common example of a non-business asset.

The restriction only applies where:

1. During the one year prior to the gift the transferor has held at least 25% of the voting rights in the company; or
2. The transferor is an individual and, at any time during the one year prior to the gift, they were a director or employee of the company and held at least 5% of the ordinary share capital and voting rights.

here the restriction applies the gain which can not be deferred (and is, therefore, taxable) is equivalent to the gain (as originally calculated) multiplied by the proportion of the chargeable assets of the company (or group) that are chargeable business assets.

For example, Company A is owned 100% by Mr. X who originally founded the company and started trading in 2005. Mr A wants to gift his daughter, Miss X, a 10% holding in the company. The company owns its trading premises (valued at £2m) but also owns an investment property worth £400,000. The company has no other chargeable assets. In this case around 17% (£400,000/£2.4m) of the gain arising on the gift would be subject to capital gains tax.

If you have any queries in relation to the above please let us know.

This is intended as a summary and overview of the tax situation and does not constitute financial advice and no action should be taken without first seeking professional advice specific to your circumstances.