Reduce pain of sizeable gain

26 October 2012 / Insight posted in

MA writes: I am about to sell my share in a travel business I set up with a colleague. The sum I am likely to realise is more than I originally thought and I am looking at a sizeable gain on which CGT would be charged. How can I minimise this potential liability? Can I transfer some of my shares to my children prior to the sale to save tax and then use that money to pay their school fees, clothing etc in the future?

If you are over 50, or retire earlier due to ill-health, retirement relief, although being phased out between next year and 2003, may be available. Subject to limits, this relieves CGT that would otherwise be due on the sale of part or all of the business, on assets used in the business or, in the case of a company, the sale of your shares by a full-time working director or worker who owns at least 5% of the shares. At present retirement relief exempts the first £250,000 of capital gain and you pay tax at half the rate on the next £750,000. Alternatively, you could use the tax reliefs available under the proposed new unified enterprise investment scheme. By reinvesting the proceeds of the gain on sale of your business into a new qualifying business you could defer this gain and your liability to CGT until you sell the new shares. You would also obtain income tax relief (subject to an annual ceiling of £150,000) on your investment. CGT relief is given on the new shares if you hold them for at least five years. In theory, the transfer of shares to young children with the aim of using that money to pay for school fees and other costs is possible. There are a number of possible ways of achieving this, including the use of trusts. But, if the transfer is made with an imminent sale in mind there are complications to be taken into account to avoid the sale gain remaining a taxable event for you rather than the children and there are also anti-avoidance tax provisions that can treat any income arising for the children as being yours for tax purposes. One simple alternative to consider, is if your spouse has unused CGT annual exemption, to give some shares to your spouse to use up his or her £6,800 of tax-free gains. Before you take any action you should consult your professional adviser.