Cgt Vs Pet
If the retiring directors gift their shares to the remaining shareholder, the transaction is typically considered a Potentially Exempt Transfer (PET) for Inheritance Tax (IHT) purposes rather than an immediate chargeable event for Capital Gains Tax (CGT). However, Capital Gains Tax (CGT) is more relevant here, as gifting shares is considered a disposal at market value.
Capital Gains Tax (CGT) Implications
When the retiring directors gift their shares, HMRC treats it as a disposal at market value, even though no money is changing hands. This means:
1. Market Value Rule Applies:
• The shares are deemed to be sold at their current market value, not the original acquisition cost.
• If the shares have increased in value since acquisition, the directors will face a CGT liability on the difference between market value and their acquisition cost.
2. Possible Reliefs Available:The directors may be eligible for reliefs such as:
• Business Asset Disposal Relief (BADR) (formerly Entrepreneurs’ Relief) – If the shares qualify, the CGT rate could be reduced to 10%.
• Holdover Relief: If the shares qualify as business assets, they may be able to defer the gain by “holding over” the tax until the recipient disposes of them.
• Annual CGT Allowance: Each donor can use their annual CGT exemption (£6,000 for 2024/25 tax year).Inheritance Tax (IHT) Implications
If the directors gift their shares, the transaction is classified as a Potentially Exempt Transfer (PET) under IHT rules, meaning:
1. No Immediate IHT Charge:
• If the donor survives for 7 years after the gift, it falls outside their estate for IHT purposes.
2. Taper Relief:
• If the donor dies within the 7-year period, taper relief may reduce the IHT liability depending on the number of years survived.
3. Exemptions:
• If the shares are part of a trading business, Business Property Relief (BPR) might apply, reducing the value for IHT purposes by up to 100% (if conditions are met).| Factor | Capital Gains Tax (CGT) | Potentially Exempt Transfer (PET) - IHT |
|---|---|---|
| Trigger Event | Immediate upon gifting | Only if donor dies within 7 years |
| Tax Calculation | Market value vs acquisition cost | Full value included if donor dies within 7 years |
| Reliefs Available | BADR, Holdover Relief, Annual Exemption | BPR, Annual Gift Exemptions |
| Impact on Donee | Receives shares at market value (for CGT on sale) | No immediate impact |
Planning Considerations
If CGT liability is a concern, the directors could consider alternatives such as:
1. Transferring in stages:
• Gifting shares gradually over multiple tax years to maximize CGT allowances.
2. Using Holdover Relief:
• If the shares qualify, deferring the gain to the recipient and avoiding an immediate tax charge.
3. Retaining Some Control:
• Using different share classes or agreements to stagger ownership transition.
4. Sale Instead of Gift:
• If the remaining shareholder purchases the shares, the proceeds can be structured efficiently, e.g., via loan notes or installments.Conclusion
If the retiring directors gift their shares, they are more likely to face CGT issues upfront, while the transaction will be a PET for IHT, which is only relevant if they pass away within 7 years. Careful planning, including reliefs like Holdover Relief or BADR, can mitigate tax exposure.