QUESTION: As I approach 65 and having owned and operated a small manufacturing business for the last 35 years, I would like to transfer my shares to my two adult sons who work in the business. What are the tax implications?
ANSWER: Transferring shares in your small manufacturing business to your adult sons is a significant decision, and it's essential to consider the UK tax implications involved in this process. Some of the key tax points you need to consider are:
When you well shares to your sons, the most crucial tax to be aware of is capital gains tax (CGT) a tax on the profit you make from selling or transferring assets, such as shares. In the UK, individuals have an annual tax-free allowance for capital gains. The allowance for tax year 2023/24 is £3,000 per person. Any gains exceeding this threshold may be subject to CGT.
On a sale of shares to your sons, as this is a connected party transaction, market value rules will be applied to your shareholding. This will be the value used for tax purposes. Normally CGT on the disposal of shares are taxed at 20% on the gain. However, business asset disposal relief (BADR) is a tax relief that can reduce the CGT to 10%.
It’s worth noting that BADR claims can only be made up to a lifetime limit, which is currently set to £1 million.
Where you decide to gift your shares to your sons, gift relief, also known as hold-over relief, is another important tax relief in the UK that can be relevant when gifting shares in a trading company. It's designed to reduce or delay the potential CGT liability that arises from the transfer of assets, including shares.
Gift relief allows you to give away or transfer assets, such as shares, to another person or company without immediately triggering a CGT liability. Instead of you (the donor) paying CGT at the time of the gift, the recipient (donee) takes on the CGT liability when they eventually dispose of the asset. There are several conditions that need to be met to qualify for gift relief.
The extent of relief you can obtain under gift relief is highly dependent on the specific circumstances of the gift and whether the conditions for full relief are met. Partial relief means that you can defer only a portion of the CGT liability when gifting shares. This can occur in specific situations where the conditions for full relief are not entirely met eg if the company you're transferring shares in is not a trading company or is involved in non-qualifying activities, you might not qualify for full relief.
In summary, transferring shares in your manufacturing business to your sons can have tax implications, primarily in the form of CGT. Whether you choose to gift or sell the shares, it's crucial to consider your annual tax-free allowances, the potential eligibility for BADR, and the overall inheritance tax implications for your estate. It is recommended that professional advice be received from your accountant or tax adviser before you proceed.
:: Malachy McLernon (firstname.lastname@example.org) is partner FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies