I am considering either selling my company or gifting the shares to my children. Are the tax implications of each event similar or are there differences?
Your query deals with the classic interaction between two capital taxes, namely Capital Gains Tax (CGT) and Inheritance Tax (IHT).
If you sell your business and assuming that you have been an office holder (director / secretary) or an employee for more than 24 months, you will be liable to pay Capital Gains Tax probably at the Entrepreneurs rate of 10% on the assumption that you have held more than 5% of the company shares for the qualifying period. The CGT rate of 10% is charged on the difference between your original cost of your shares and the sales proceeds after your annual capital gains tax exemption. You will then be in receipt of approximately 90% of the cash proceeds and if these are to reside in your bank account they are immediately potentially liable to inheritance tax at a rate of 40% assuming that the balance of your estate will use up your nil rate inheritance tax band of £325k at death. The obvious way to avoid this IHT charge is to leave your entire estate including the post sale cash to your wife however this simply defers the problem until your wife’s death. For this reason therefore people in your circumstances often make lifetime gifts of shares or lifetime gifts of the post sale cash proceeds to the next generation.
The problem of gifting shares to your children is that although no consideration passes between you, the shares are deemed to have been sold at the market value at the date of the gift and although you will be entitled to entrepreneurs relief as detailed above, your children are not giving you any cash for the gift and therefore you will have no cash to pay the capital gains tax with. To get around this problem, both you and your children can enter into a joint election known as a holdover relief election whereby the children agree that they will take over your base cost of the shares and they will pay the capital gains tax eventually when they sell the shares and this means that you have no capital gains tax to pay on the gift. As the gift of the shares is a gift of a business asset, for IHT purposes, the gift will be regarded as a potentially exempt transfer or (PET) such that should you die within seven years of making the gift then IHT business property relief would apply normally. A problem arises however if your children have sold the shares prior to your death and in this instance business properly will not be available.
Often people in your circumstances are wary of making out right gifts to children in case the children encounter an adverse lifetime event such as insolvency, matrimonial dispute or even a early death. For these reasons trusts are often employed and a third option for you is to transfer the shares in the company into trust and on a transfer the capital gain normally raising can be held over and the transfer should also be free of inheritance tax as business property relief will apply.
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