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Our client has been the sole owner of the freehold company premises for in excess of 30 years. The premises cost approximately £15,000 and are now worth £285,000.
Our client has been the sole owner of the freehold company premises for in excess of 30 years. The premises cost approximately £15,000 and are now worth £285,000.
Our client, the former managing director of his family company, wishes to pass the property on to his three sons, two of whom own 95% of the shares in the company (the other son is unconnected with the business). Our client has now resigned from the company, which purchased and cancelled his shares. If the premises are put into a trust for the three sons (all of whom are married), could this transaction be a holdover situation for capital gains tax purposes and be a potentially exempt transfer?
The premises are not and have never been the subject of a lease, nor is any rent payable. Our client is now mid-sixties and is in good health.
Readers' thoughts on this scenario would be welcomed.
Query T16,694 — CMS.
Reply by Exile:
I would really like a lot more information to answer this question properly. For example, how many shares did the client own and of what type were they? What is the nature of the company's business? Has the client made any other gifts or is he likely to do so? When were the shares cancelled? We are not told what will be the nature of the trusts. Since CMS is referring to a potentially exempt transfer (PET) we have to assume that the trust is meant to be an interest in possession trust. If it is, then the transfer will be a PET.
That leaves us with the question of holdover relief. The relief, presumably, will be under TCGA 1992, s 165, which gives relief for the gift of business assets. Section 165(2) defines what is a business asset; it is such an asset if it used for the purposes of a trade carried on by his personal company. In that respect, no rent has been charged so that the asset has been used by the company, rather than being used by the owner to earn rent from the company. So far, so good. We are not told that the company is a trading company. If it is not carrying on a trade from the premises, there will be no holdover relief. If it is carrying on a trade and the building is in use for the trade, the property will qualify as a business asset for s 165.
However, it has to be used by the individual's personal company. A personal company is defined in s 165(8) as a 'company the voting rights in which are exercisable, as to not less than 5%, by that individual'. In this case, the individual may have held 5% of the votes, although we are not told that. However, the legislation uses the present tense. The matter is far from clear, but HMRC certainly make it clear in the Capital Gains Manual that they read the trading condition to be one that has to be fulfilled immediately before the disposal (see CG66950). Therefore, I do not think that holdover relief will be available if the trust is not a discretionary trust, unless CMS wants a fight with HMRC.
That then leaves us with the relief afforded by TCGA 1992, s 260. That applies where a gift is chargeable to inheritance tax. In fact, if s 260 is applicable, it takes precedence over s 165. Therefore, if the gift is a gift to a discretionary trust it will be chargeable. If the client has not made any chargeable gifts in the last seven years, he will have the full nil rate band of £275,000 available. If he is not planning to make any more chargeable lifetime gifts in the next seven years and if he survives the seven years, there will be inheritance tax on the value of the gift above the nil rate band. That will be 20% on £10,000 only.
The alternative is to forget about holdover relief. The gain could be calculated, remembering that March 1982 value and indexation to April 1998 can be used. Providing we have a trading company and the shares were not sold too long ago, there may be a fair amount of taper relief available. I cannot be more specific because, again, we do not know if the client had more than 25% or was a full-time working officer. Whatever the outcome, there will be a certain amount of capital gains tax to set against a possible small amount of inheritance tax. The inheritance tax is not certain because it depends upon what else is in the estate, what other gifts have been or could be made and what attitude the client wants to take towards the risk.
Reply by Snorkel:
The short answer to the question asked is 'no'. To be both eligible for holdover and to be treated as a potentially exempt transfer, the gift would have to be subject to a claim under TCGA 1992, s 165. Now that the father has disposed of his interest in the company, it is no longer his 'personal company'. No less than 5% of the votes need to be exercisable by the father for it to be so.
However, relief may be available under TCGA 1992, s 260. This relief applies to a gift (being a non-arm's length bargain) which is a chargeable transfer under IHTA 1984. A gift to a discretionary settlement will be such a transfer. As long as the father is irrevocably excluded from benefit under the settlement, there should be no reservation of benefit or pre-owned assets tax problem. The amount of the gift would be only slightly above the inheritance tax threshold of £275,000 for the current year. It would probably be desirable, nevertheless, to ensure that the trust is within the nil-rate band and this may be achieved by the trustees agreeing to pay a small consideration. The consideration should not reduce the gain eligible for holdover relief as it is not going to exceed the sums allowable under TCGA 1992, s 38 (TCGA (s 260(5)). Thus, full holdover relief should be available on a chargeable inheritance tax transfer with no tax payable.
It should be noted that the trustees should be able to accrue business asset taper relief, but they will be starting a new taper clock ticking. Therefore it may not be a wise decision to do this if there is any prospect of a third party sale of the property in question in the next two years.
