One of the major aims of anyone approaching the end of their working lives is to ensure that they ha...
One of the major aims of anyone approaching the end of their working lives is to ensure that they have enough money saved and invested to provide for a long and happy retirement.
Most people will plan to make sure that the mortgage is paid off, that pension contributions have been maximised, that savings are invested to provide the right balance of income and capital and that other outgoings are reduced.
If you are in business for yourself or in partnership or are the majority shareholder in a family company, one of the most valuable assets in your possession is your interest in your business. As part of retirement planning you should be considering the most effective and efficient method to unlock the value in your business.
There are a number of tax reliefs available that can be utilised to ensure that as little as possible of the wealth derived from your business is given to the Taxman.
There are two main tax reliefs to consider when disposing of a business:
l Retirement relief
l Taper relief
Retirement relief is currently being phased out and effectively replaced by taper relief. However, we are currently in a transitional phase where both reliefs are potentially available.
The name retirement relief is somewhat misleading as you do not have to actually retire to be eligible. However, you do have to make a material disposal of your business interests. There are other conditions to be met before the relief is obtained which are broadly as follows:
l You have to be 50 years of age or having to retire earlier due to ill health
l You have to have worked full time in the business
l If you are a shareholder you have to own at least 5% of the shares it is your "personal company"
l The activity of the business has to be trading in nature, not activities such as property investment and the company must be unquoted.
Currently (tax year 2000/01) retirement relief will shelter the first £150,000 of any gain realised on your shares or business assets, such as trading premises and goodwill, and half of the gain between £600,000 and £150,000.
Example: Mr A aged 63 sold shares in his personal company for £600,000. Retirement relief of £375,000 would be available calculated as follows: £150,000 + ½ (£600,000 £150,000) = £375,000.
Retirement relief is restricted where there are non-trading assets in the business. If your personal company owns investment property from which it derives a rent or holds quoted investments, it would be beneficial in relation to retirement relief for the company to dispose of these prior to any disposal of the shares.
To obtain retirement relief it is necessary to have a material disposal. Particularly when looking at company shares, it is possible to create a "deemed disposal" by transferring the shares into a trust. This crystallises any retirement relief due before it is abolished and can be structured so that there is no loss of control over the shares.
Taper relief was first introduced in 1998 in relation to disposals of any asset. The amount of relief due is determined by the type of asset sold and the period of ownership (inter-spouse transfers are treated as one period of ownership). There is a crucial distinction between "business" and "non-business" assets which is explained below. The rules concerning taper relief have been amended in the Finance Act 2000 and the following is based on the revised rules which apply from 6 April 2000.
Business assets which are not shares an asset which is used wholly or partly for one or more of the following:
l A trade carried on by an individual/partnership
l A trade carried on by a company which is a qualifying company by reference to the individual
l A trade carried on by a company which is a member of a trading group of which the holding company is a qualifying company by reference to the individual
l Any office or employment of the individual which requires him to devote "substantially the whole of his time" (normally 75% of normal working hours)
Business Assets which are shares business asset taper relief is available on a disposal by an individual if the relevant company is a "qualifying company" by reference to that individual. Qualifying company from 6 April 2000:
l All shareholdings in unquoted trading companies or the holding company of a trading group
l All shareholdings in quoted companies where the individual is an officer or employee (no requirement for this to be full time)
l All quoted shareholdings where the individual has at least 5% of the voting rights
If an asset does not fall within the above definitions it is a non-business asset.
So how does the relief work? The level of relief is based on length of ownership with 6 April 1998 as the starting point as well as the type of asset as described above.
Example: Miss B sells shares in her unquoted trading company for £600,000 in December 2005. As she has owned the shares for more than four years she is entitled to 75% Taper Relief so that tax is payable on only £150,000 of the gain.
The tax due of £60,000 at a rate of 40% means an effective tax rate on the proceeds of only 10%.
For non-business assets the level of relief is less generous and no relief is due until the asset has been owned for at least four years. The relief ranges from a 5% reduction in the taxable gain after four years to a maximum reduction of 40% if the non-business asset is held for more than 10 years.
However, if the asset was owned on the 17 March 1998 the Government gives you a bonus
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