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21 February 2001
Replies to Queries – 1
Business sale problems
Our clients are a husband and wife, equal shareholders in a company providing health care consultancy and services. The wife is the only director.
In March 2000, the business activities of the company were sold producing a capital gain on the sale of goodwill amounting to £111,000. After the capital gains tax is paid, the company is left with net assets of £114,000. Both the shareholders are in their fifties.
Business sale problems
Our clients are a husband and wife, equal shareholders in a company providing health care consultancy and services. The wife is the only director.
In March 2000, the business activities of the company were sold producing a capital gain on the sale of goodwill amounting to £111,000. After the capital gains tax is paid, the company is left with net assets of £114,000. Both the shareholders are in their fifties.
Replies to Queries – 1
Business sale problems
Our clients are a husband and wife, equal shareholders in a company providing health care consultancy and services. The wife is the only director.
In March 2000, the business activities of the company were sold producing a capital gain on the sale of goodwill amounting to £111,000. After the capital gains tax is paid, the company is left with net assets of £114,000. Both the shareholders are in their fifties.
It is now proposed to wind up the company and distribute the cash in the company to the shareholders, thus creating a capital gain in their hands. It is hoped to claim retirement relief but our concern is that the company has not traded since March 2000.
The directors continued to provide consultancy services to the purchasers of the goodwill for six months under the sales contract. We have only just been approached and find that the main trading ceased 10 months previously and the continuing contract ceased 4 months previously.
Can readers confirm that retirement relief will still be applicable on the proceeds from winding up the company or suggest other ways of removing the funds from the company without further tax liability?
(Query T15,756) – Carer.
Retirement relief is available to a full-time working officer or employee who is 50 or over and disposes of shares in his/her personal trading company (section 163, Taxation of Chargeable Gains Act 1992). The shares must have been owned for 12 months or more and maximum relief is available if they have been owned for a period of 10 years.
Where a company ceases trading before the disposal date of the shares, relief is available provided the disposal is within the 'permitted period' and the officer/employee qualifies for retirement relief at the date of cessation, the 'operative date' (section 163(6)). The 'permitted period' is 12 months or such longer time as the Board may allow (paragraph 1 of Schedule 6 to the Taxation of Chargeable Gains Act 1992).
The company appears to have ceased trading in March 2000. (I am assuming the consultancy services of the director and her husband were provided personally and not through the company.) The company can be wound up under section 652, Companies Act 1985 and the shareholders should ask the Inland Revenue to apply Extra-statutory Concession C16 to treat distributions as capital which can qualify for retirement relief. To avoid having to rely on the Revenue to extend the permitted period, the distributions should be made within 12 months of the cessation of trade. If this is not possible, perhaps because the assets have been invested, consider gifting the shares into an interest in possession trust to trigger the gain.
The wife is a director and over 50. The husband is not a director but may qualify as a full-time employee. Retirement relief is being phased out, but for disposals in 2000-01 gains of up to £150,000 are totally exempt. So if husband and wife both qualify for relief, the whole of the gain can be covered by retirement relief. If for some reason husband or wife or both do not qualify for retirement relief, then consideration should be given to distributing the assets as income chargeable at higher rates only or as capital spread over several years to use annual exemptions. Business taper relief will be of limited help as the company ceased trading in March 2000. – G.S.
It would be unfortunate indeed if this cost two lots of capital gains tax. The intention of the legislation is to give retirement relief while it lasts, to a full-time working director who receives a capital sum for shares in his company where the gain clearly relates to the disposal of a business asset by the company.
This illustrates that the adviser has two problems: the status of the husband and the time factor. A possible third problem is non-business assets.
It is assumed both directors were over 50 at March 2000 and that the company had carried on the business for several years. It is not clear whether the husband has worked full time in the business. If not, he will not be entitled to any retirement relief.
The problem relating to time is that it is now nearly one year since the disposal by the company, so any retirement relief may be at risk.
If the consultancy services were provided by the company, the one-year period can be extended for as long as the director(s) were continuing to work full time (probably not very long).
Retirement relief is subject to a brutal reduction by reference to the ratio of business to non-business assets at the time of disposal (of the shares) which has no regard to monetary values. For example a company, which had reserves of £150,000 following cessation of trading represented by a freehold garage, rented out, and therefore not a business asset, worth £1,000 and cash of £149,000 would result in the complete loss of retirement relief. The reason is that the only chargeable asset, the garage, is a non-business asset.
Fortunately the measure of this is taken at the time of disposal of the shares, so in the above example the sale of the garage prior to the sale of the shares would result in full retirement relief.
If, therefore, it can be ensured that there are no non-business chargeable assets in the balance sheet and the distribution can take place within one year of ceasing to work full time, then the wife at least is entitled to relief. If the husband worked full time, he is also entitled to relief.
If the husband is not entitled to relief but the wife is so entitled, one could make a distribution to her but not to him and keep the company going for him as an investment vehicle. How to get the capital out of the company for him without much tax would be a whole new query! – Heigh-Ho!
Extract from reply by 'Hodgy':
The Inland Revenue's Capital Gains Tax Manual at paragraphs CG63580 and CG63582 does indicate that if the chargeable business assets of the company have not been rented or otherwise used since cessation, then a longer period of up to three years will be allowed.
However, it is best not to have to rely on the discretion of the local Inspector, and so 'Carer' should arrange for the company to realise its remaining assets, collect debtors and pay liabilities. The company should then make an urgent application for Extra-statutory Concession C16 to be applied by the Inland Revenue on the proposed distribution.
Business sale problems
Our clients are a husband and wife, equal shareholders in a company providing health care consultancy and services. The wife is the only director.
In March 2000, the business activities of the company were sold producing a capital gain on the sale of goodwill amounting to £111,000. After the capital gains tax is paid, the company is left with net assets of £114,000. Both the shareholders are in their fifties.
It is now proposed to wind up the company and distribute the cash in the company to the shareholders, thus creating a capital gain in their hands. It is hoped to claim retirement relief but our concern is that the company has not traded since March 2000.
The directors continued to provide consultancy services to the purchasers of the goodwill for six months under the sales contract. We have only just been approached and find that the main trading ceased 10 months previously and the continuing contract ceased 4 months previously.
Can readers confirm that retirement relief will still be applicable on the proceeds from winding up the company or suggest other ways of removing the funds from the company without further tax liability?
(Query T15,756) – Carer.
Retirement relief is available to a full-time working officer or employee who is 50 or over and disposes of shares in his/her personal trading company (section 163, Taxation of Chargeable Gains Act 1992). The shares must have been owned for 12 months or more and maximum relief is available if they have been owned for a period of 10 years.
Where a company ceases trading before the disposal date of the shares, relief is available provided the disposal is within the 'permitted period' and the officer/employee qualifies for retirement relief at the date of cessation, the 'operative date' (section 163(6)). The 'permitted period' is 12 months or such longer time as the Board may allow (paragraph 1 of Schedule 6 to the Taxation of Chargeable Gains Act 1992).
The company appears to have ceased trading in March 2000. (I am assuming the consultancy services of the director and her husband were provided personally and not through the company.) The company can be wound up under section 652, Companies Act 1985 and the shareholders should ask the Inland Revenue to apply Extra-statutory Concession C16 to treat distributions as capital which can qualify for retirement relief. To avoid having to rely on the Revenue to extend the permitted period, the distributions should be made within 12 months of the cessation of trade. If this is not possible, perhaps because the assets have been invested, consider gifting the shares into an interest in possession trust to trigger the gain.
The wife is a director and over 50. The husband is not a director but may qualify as a full-time employee. Retirement relief is being phased out, but for disposals in 2000-01 gains of up to £150,000 are totally exempt. So if husband and wife both qualify for relief, the whole of the gain can be covered by retirement relief. If for some reason husband or wife or both do not qualify for retirement relief, then consideration should be given to distributing the assets as income chargeable at higher rates only or as capital spread over several years to use annual exemptions. Business taper relief will be of limited help as the company ceased trading in March 2000. – G.S.
It would be unfortunate indeed if this cost two lots of capital gains tax. The intention of the legislation is to give retirement relief while it lasts, to a full-time working director who receives a capital sum for shares in his company where the gain clearly relates to the disposal of a business asset by the company.
This illustrates that the adviser has two problems: the status of the husband and the time factor. A possible third problem is non-business assets.
It is assumed both directors were over 50 at March 2000 and that the company had carried on the business for several years. It is not clear whether the husband has worked full time in the business. If not, he will not be entitled to any retirement relief.
The problem relating to time is that it is now nearly one year since the disposal by the company, so any retirement relief may be at risk.
If the consultancy services were provided by the company, the one-year period can be extended for as long as the director(s) were continuing to work full time (probably not very long).
Retirement relief is subject to a brutal reduction by reference to the ratio of business to non-business assets at the time of disposal (of the shares) which has no regard to monetary values. For example a company, which had reserves of £150,000 following cessation of trading represented by a freehold garage, rented out, and therefore not a business asset, worth £1,000 and cash of £149,000 would result in the complete loss of retirement relief. The reason is that the only chargeable asset, the garage, is a non-business asset.
Fortunately the measure of this is taken at the time of disposal of the shares, so in the above example the sale of the garage prior to the sale of the shares would result in full retirement relief.
If, therefore, it can be ensured that there are no non-business chargeable assets in the balance sheet and the distribution can take place within one year of ceasing to work full time, then the wife at least is entitled to relief. If the husband worked full time, he is also entitled to relief.
If the husband is not entitled to relief but the wife is so entitled, one could make a distribution to her but not to him and keep the company going for him as an investment vehicle. How to get the capital out of the company for him without much tax would be a whole new query! – Heigh-Ho!
Extract from reply by 'Hodgy':
The Inland Revenue's Capital Gains Tax Manual at paragraphs CG63580 and CG63582 does indicate that if the chargeable business assets of the company have not been rented or otherwise used since cessation, then a longer period of up to three years will be allowed.
However, it is best not to have to rely on the discretion of the local Inspector, and so 'Carer' should arrange for the company to realise its remaining assets, collect debtors and pay liabilities. The company should then make an urgent application for Extra-statutory Concession C16 to be applied by the Inland Revenue on the proposed distribution.
