Tax and Legal Question
Discussion
I've got an interesting situation developing, and have received conflicting advice from a couple of Tax advisors. As such, I thought I'd see if anyone on here can assist.
In short, we're at the final knockings of selling a particular company which has 5 shareholders each with 20%. Sadly, one of the shareholders died a few months ago. The others wanted to continue with the sale - which they are. Now, however, the son and heir of the guy who died is saying "let's not sell we could a higher price in a few years" - which I seriously doubt, by the way! My question, which could effect the motive of the kid, is this:
Currently to get full CGT taper relief (75%) - thus paying just 10% Tax - the shareholder must have owned the shares for two years or more. If someone has inherited the shares does the taper clock have to be reset?
I look forward to thousands of replies!
In short, we're at the final knockings of selling a particular company which has 5 shareholders each with 20%. Sadly, one of the shareholders died a few months ago. The others wanted to continue with the sale - which they are. Now, however, the son and heir of the guy who died is saying "let's not sell we could a higher price in a few years" - which I seriously doubt, by the way! My question, which could effect the motive of the kid, is this:
Currently to get full CGT taper relief (75%) - thus paying just 10% Tax - the shareholder must have owned the shares for two years or more. If someone has inherited the shares does the taper clock have to be reset?
I look forward to thousands of replies!
I am not in anyway qualified to respond - so obviously take it with a pinch of salt but....
The son will have inherited the shares at a certain value and conveniently, if you were selling the company before the person died, this valuation should have been used when going through probate. It would have then been subject to IHT if appropriate. The son therefore should not have any CGT liability at all, as he has not made any capital gain.
Of course, as there sounds like there is no readily available market to determine the value of the shares the shares could have been valued conservatively, perhaps to escape IHT. That might result in a significant capital gain, and I am not sure how that situation would be handled (if in doubt...it must be taxable)
. And of course paying the CGT, may just invite the taxman to have another look at the IHT.
Andy.
The son will have inherited the shares at a certain value and conveniently, if you were selling the company before the person died, this valuation should have been used when going through probate. It would have then been subject to IHT if appropriate. The son therefore should not have any CGT liability at all, as he has not made any capital gain.
Of course, as there sounds like there is no readily available market to determine the value of the shares the shares could have been valued conservatively, perhaps to escape IHT. That might result in a significant capital gain, and I am not sure how that situation would be handled (if in doubt...it must be taxable)
. And of course paying the CGT, may just invite the taxman to have another look at the IHT. Andy.
For business assets (including shares in a private company) Taper Relief starts only after one complete year of ownership have elapsed. The Taper Relief after one year is 50% and 75% after two years.
Did this individual inherit a full 20% of the company's shares?
If the gain on the disposal - which is the gain made by reference to the Market Value of the shares on the date he acquired them - is less than the annual Capital Gains Allowance (£8,500 for tax year 2005/06)then he will not have any CGT liability arising. That is assuming, of course, that he has no other gains in the same tax yearwhich push him over the £8,500 limit.
>> Edited by Eric Mc on Thursday 20th October 22:59
Did this individual inherit a full 20% of the company's shares?
If the gain on the disposal - which is the gain made by reference to the Market Value of the shares on the date he acquired them - is less than the annual Capital Gains Allowance (£8,500 for tax year 2005/06)then he will not have any CGT liability arising. That is assuming, of course, that he has no other gains in the same tax yearwhich push him over the £8,500 limit.
>> Edited by Eric Mc on Thursday 20th October 22:59
Eric Mc said:
For business assets (including shares in a private company) Taper Relief starts only after one complete year of ownership have elapsed. The Taper Relief after one year is 50% and 75% after two years.
Did this individual inherit a full 20% of the company's shares?
If the gain on the disposal - which is the gain made by reference to the Market Value of the shares on the date he acquired them - is less than the annual Capital Gains Allowance (£8,500 for tax year 2005/06)then he will not have any CGT liability arising. That is assuming, of course, that he has no other gains in the same tax yearwhich push him over the £8,500 limit.
>> Edited by Eric Mc on Thursday 20th October 22:59
Yes - he inherited 20%.
I don't know what value they were stated for IHT calculations - he won't tell us! I suspect not as much as the value under offer (£3m for 100% of the shares, therefore £600k).
Valuing shares in private companies is not straightforward. Since they are not generally available on the open market they do not have a set "Market Value". Therefore, getting a realistic value is aabit hit and miss. Essentially it is the value of the company divided by the number of shares - also taking into account what you might "think" the shares would fetch on the open market.
The Inland Revenue have their own team of district valluers who can order a valuation to match THEIR expectations, if they do not agree with initial valuations made by the taxpayer or his/her representatives.
The Inland Revenue have their own team of district valluers who can order a valuation to match THEIR expectations, if they do not agree with initial valuations made by the taxpayer or his/her representatives.
Eric Mc said:
Valuing shares in private companies is not straightforward. Since they are not generally available on the open market they do not have a set "Market Value". Therefore, getting a realistic value is aabit hit and miss. Essentially it is the value of the company divided by the number of shares - also taking into account what you might "think" the shares would fetch on the open market.
The Inland Revenue have their own team of district valluers who can order a valuation to match THEIR expectations, if they do not agree with initial valuations made by the taxpayer or his/her representatives.
Indeed. I think they would have undervalued the shares for probate valuation, bacause although the company is profitable it has minimal assets. The reason we achieved such a decent price is because we generated a bidding war between several companies. My question could be changed to this then:
Let's say they've been valued for probate at, say, £100k. However, they are immediately sold for £600k. Because he's not owned them for very long, presumably he's gonna be screwed for 40% of £500k (£200k). Or, can the Taper clock be rolled over from the demise of his father, thus he'd only pay £50k tax. If it's the former then that may well be the reason he's keen to delay the sale - nothing to do with selling the company for more money in 2 years, more like preferential Tax position.
Edited to add: I'm on 3% commission, so I've got £100k riding on the deal going through. One option I wondered about was the lad getting his 20% in interesting bearing Loan Notes, redemmeable in 2 years. I could certainly find a commercial reationale for such a deal structure.
>> Edited by srebbe64 on Friday 21st October 09:01
Eric Mc said:
It all sounds rather technical. I would have a solicitor/top flight tax accountant and a business valuer on board toute suite.
I've got several already, and one or two are contradicting each other - hence my post! I think I'll have a little chat with the Inland Revenue and see what they say!
Cheers Eric!
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