Capital gains tax rates are at their lowest ever, which is petty cool, so if you’re selling your company and expect to make a gain you probably won’t want to consider high-risk schemes to save tax.
Since April 2016 the two main rates of capital gains tax (CGT) have been 10%, if your taxable income plus gains for the year fall within the basic rate band and 20% if your income and gains are greater. However, where you sell your business, and meet the necessary conditions, a special 10% entrepreneurs’ relief (ER) rate applies regardless of how much your income and gains are. Before CGT starts to apply, every individual adult or child is entitled an exempt amount; for 2017/18 this is £11,300. The annual exemption is easily overlooked despite offering a no-risk tax planning opportunity in the right circumstances.
No gain, no loss
Special CGT rules apply to transfers of assets between spouses, so marriage comes into it’s own! These say that if one spouse gives assets to the other, say shares in a company, it’s treated as if they sold them to their spouse at the price equal to their cost. This is called a “no-gain, no-loss” transaction. If later the spouse who received the assets sells them for more than they cost the first spouse, they’ll make a capital gain, but they can use their annual exemption to lower or eliminate any CGT.
Bonus If you’re married or have a civil partner, you can use the no-gain, no-loss rule to save tax even where the rate of CGT you would pay is the lowest possible, i.e. where the ER rate applies.
Lets look at some examples;
Rosie owns all the shares in AH Ltd. In November 2017 she accepts an offer for the company of £600,000. Rosie paid £100 for her 100 shares in AH, so her CGT bill is £586,860 ((£600,000 – £100 – £11,300 annual exemption) x 10% ER rate). It would be easy for Rosie to reduce her CGT bill by shifting shares to her spouse.
Rosie’s gain is £5,999 per share. If she gives two shares to her husband Bernard when AH is sold he’ll make a gain of £11,998. His annual exemption covers £11,300 of this leaving £698 taxable. If Bernard is liable at the main 10% CGT rate, the tax saving between Rosie and Bernard is £1,130 (£11,300 x 10%). But he is liable at the higher main rate of 20% so the saving is £990. This is only a modest tax saving, but there’s virtually no effort and zero risk in achieving it so there’s no reason not to take advantage!
Increasing the tax saving!
The no-gain, no-loss rule doesn’t apply to gifts of assets to anyone other than your spouse or civil partner. If Rosie from our example gave shares to her children so they received something from the sale of AH Ltd, HMRC would treat the gifts as if Rosie sold the shares at their full value. That would land her with the same CGT bill as if s he sold the shares to the person buying the company. However, thankfully there’s a legitimate way around this…
Rosie can claim CGT holdover relief. The effect of this is similar to giving shares to her husband. The gain is deferred until the children sell their shares. A holdover (deferred) claim must be made jointly by Rosie and her children, and usually anti-avoidance rules make it ineffective if the children are minors, (under the age of 18).
Before signing the sale contract, transfer shares to your spouse. This shifts part of the gain to them against which they can use their annual exemption. This can save CGT of at least £990. You can achieve a similar result by transferring shares to family members, but this requires you to make a claim for “holdover relief”.
So with all those savings you can kick back and enjoy Christmas and we look forward to joining you again in the New Year, with more information to help you really Focus on the things that count.
Thanks for reading and a very Merry Christmas and a Happy New Year!