Tax adviser’s recipe for caterer wanting to pass firm on to son
JB writes: I own a catering company with an annual turnover of £3m and profit (before my salary) of £100,000 a year. The net assets, though, are worth only £50,000. My son has joined the business and, given that I am 53, I think it would make sense for tax purposes if I transferred my shares to him. What are the tax implications and what would be involved?
The question of succession is going to come up in almost every family-owned business, writes Michael Snyder, senior partner of Kingston Smith. Transferring the shares to your son involves both capital-gains tax (CGT) and inheritance tax (IHT) issues. When you transfer the shares, the capital gain created will be based on the market value of the shares less their original cost. Given the profits that your business is making, the market value of the shares is likely to be much more than the book value of the company. You can defer this CGT bill by a “holdover” election for part or all of the gain. A part election may be required because retirement relief may be available as long as you have not claimed before. If you claim relief, you would avoid tax altogether on the first £50,000 of the gain and also get relief on half of the next £150,000. You can then reduce the tax you would have to pay on the rest of the gain to 10% by claiming business-asset taper relief (BATR). If there is any chance that you will sell the company in the next year or two, then you should not transfer the shares because your son will not qualify for full BATR. IHT is a simpler issue – as long as you live for more than seven years after the shares are transferred. The shares will also attract full business-property relief, which means you will not have to pay IHT on them. The transfer process is simple. You will need to sign a share- transfer form, and you and your son will both need to sign a “holdover” election for the capital gain you are giving to him. A gift of some shares to your son with the balance into a trust may also be an option worth considering