October 29th, 2012 / Insight posted in

Can I avoid tax on gift to my sons?

NS writes: For the past 30 years my wife and I have operated a property rental and development company, owning 50% each. Our rental income is more than £200,000 plus profits on any houses we renovate and sell on. The book value of the company is £1.2m, but valuing our properties at today’s prices would give a figure of well over £2m. As we are approaching retirement, I would like to gift 15% of shares to our two adult sons. Is this possible without incurring a large tax bill?

Your company is unlikely to qualify as a trading company for tax purposes. This means you will need to think carefully about the tax consequences of gifting shares to your sons, writes Jon Sutcliffe, partner at accountant Kingston Smith LLP.

Property development is considered a trade, but holding properties for investment is not. Your accounts show the properties as fixed assets, rather than current assets, which also suggests they are held for investment. While the company may continue to develop properties, the majority of profit and assets appear to be tied up in investment, and so the company (and its shares) will not qualify as a trading company. 

The significance of this is that the gift of shares cannot be rolled over for capital gains purposes, nor be exempt from inheritance tax. However, no inheritance tax is likely to be payable if you survive the gift by seven years. 
If you give your sons your shares, then for capital gains tax purposes you are connected and your gift will be deemed a disposal at market value. The valuation for the disposal will be 15% of the book value of the company (after adjusting the property values to market value) less an appropriate discount to reflect the lack of influence that a 15% shareholding enjoys. 
Whether there will be any tax payable on the capital gains will depend on the original cost of the shares and whether you have made any other capital gains or losses in the tax year.