Gifts of business assets: Restrictions for company shares

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Ken Moody describes a potentially unfamiliar and unexpected gift relief restriction in respect of company shares. 

Most practitioners will be familiar with gift relief for business assets, but where company shares are concerned there could be an unexpected restriction.

Gift relief under TCGA 1992, s 165 is available for a disposal of:

  • an asset or an interest in an asset used for the purposes of a trade, profession or vocation carried on by the transferor, by their ‘personal company’ or by a company within a group of which the holding company is their personal company.
  • shares in a trading company or holding company of a trading group which are either unlisted or where the personal company test is met. 

The ‘personal company’ test is met by holding at least 5% of the voting power, so the test is slightly different from the personal company test for Capital Gains Tax (CGT) entrepreneurs’ relief purposes, which requires the individual to hold at least 5% of the ordinary share capital and voting rights. If the company is listed, the personal company test would have to be met in relation to the shares, but it would be unusual for an individual to hold 5% or more of the voting rights in a listed company.

Relief in relation to private company shares may, however, be restricted if the company:

(a) carries on any non-trading activities ‘to a substantial extent’ (TCGA 1992, s 165A(3)).
(b) owns any chargeable assets which are not ‘business assets’ i.e. used in the business (TCGA 1992, Sch 7, para 7).

The test at (a) is also relevant for the purposes of entrepreneurs’ relief; and as many readers will be aware, HMRC’s proposed test of what passes as ‘substantial’ is 20% (loosely based on Inheritance Tax case law), by reference to the balance of certain indicators viewed ‘in the round’ (see HMRC’s Capital Gains manual at CG64090). The 20% test is not considered further here, but it is worth mentioning that the above two tests are quite separate. 

Example: Trading company and investment property

Tradeco’s business premises are worth £1,000,000. It also owns an investment property worth £350,000 and has other fixed assets (excluding goodwill) worth £400,000 and net current assets of £250,000. As the value of the investment property is less than 20% of the total value of the company’s assets of £2 million, the property would not be regarded as ‘substantial’ in relation to the company’s assets. The company may, therefore, pass the trading company test based upon the ‘balance of indicators’ but it still owns a chargeable asset which is not a business asset, so gift relief is restricted.

Assuming the company’s other fixed assets are chargeable assets, relief is restricted to:

1,000,000 + 400,000 / 1,000,000 + 400,000 + 350,000 = 80%

On a gift of shares in Tradeco, therefore, the transferor and transferee may jointly elect under TCGA 1992, s 165 to hold over 80% of the gain (by reference to the market value of the shares gifted) and 20% of the gain would be chargeable. 

However, consider the position if Tradeco’s assets included goodwill worth £1,000,000 but it operated from rented premises. Goodwill which is within the intangible assets regime (in CTA 2009, Pt 8) is not a chargeable asset, so if the goodwill is ‘new’ (i.e. broadly acquired or generated since 31 March 2002), relief would be restricted to:

400,000 / 400,000 + 350,000 = 53%
47% of the gain would, therefore, be taxable.

Practical tip

Any restriction of gift relief for a gift of shares, by reference to the value of chargeable non-business assets, applies to the situation at the date of gift. If, therefore, it was possible to liquidate those assets (for example, if they were listed investments) prior to the gift, this would maximise the relief available. 

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