Retirement relief

Disposal of business assets to children (Section 599 Consolidation Act 1997)

A transfer of your business assets to your children is exempt from capital gains tax regardless of the sales proceeds. A child includes a nephew/niece who has worked in the business for a five year period up to the date of the disposal.

Withdrawal of the relief

If the child sells the business within six years the child will have a double liability to capital gains tax. The double liability is:

(i) the child�s own capital gains tax on the sale of the business assets; and
(ii) any capital gains tax their parent would have had to pay if relief under Section 599 did not apply to the original transfer to the child.

Disposal of business assets to a third party (Section 598 Consolidation Act 1997)

If the sales proceeds of the business assets are below £250,000 the sale of the business assets is exempt. If the sales proceeds of the business assets exceed £250,000 the sale of the business assets is liable. In this situation the tax could be limited because of marginal relief. Marginal relief will limit the tax on your business assets to half the difference between the sales proceeds of the business assets minus £250,000.

The £250,000 is a lifetime limit. The business assets may be sold piecemeal over a number of years but if the aggregate consideration of all disposals of business assets made after the taxpayer has reached the age of 55 exceeds £250,000 then the relief is withdrawn. For the purposes of calculation the £250,000 threshold assets transferred to a spouse are included at market value. Thus, while the transfer of an asset to a spouse will not be liable to capital gains tax it does, however, use part of the £250,000 exemption limit. The proceeds on disposal to the taxpayers children do not effect the relief. It is possible for a taxpayer, once over 55 years, to make a disposal of a portion of his business assets to his children which will be exempt and also a disposal to a third party and once the sales proceeds of the business assets were below £250,000 that would also be exempt. Therefore, a person can avail of both categories of retirement relief.

A person can run his business as a sole trader or through a limited company. The conditions for retirement relief and its calculation differ depending on whether you are a sole trader or run your business through a company.

Sole trader

For relief to apply to the business assets being disposed of they must be chargeable business assets of the individual which apart from tangible moveable property (plant and machinery) he has owned for a period of not less than ten years and used as a chargeable business asset throughout the 10 year period ending with the disposal. Current assets are not included in the term chargeable business assets, as no chargeable gain would result from their disposal. Therefore, when calculating the £250,000 exemption limit we do not take account of the current assets.

Let�s take an example to explain the calculation of retirement relief when we are dealing with a sole trader.

Max who is 58 years owns a small engineering factory. Due to ill health he has decided to retire and dispose of the following assets:

During the year 1998/99 Max who is a widower makes no other disposals.

You are required to calculate Max�s capital gains tax for 1998/99.

Solution

Max qualifies for retirement relief, as he is over 55 years.

What assets qualify for relief?

Does Max qualify for a total exemption on the sale of his business assets or are we going to be checking for marginal relief.

If the sales proceeds of the business assets qualifying for relief are less than £250,000, Max will have a total exemption on the sale of his business assets. However, if the sales proceeds exceed £250,000 we will have to check for marginal relief.

Sales proceeds of his business assets qualifying for relief.

As this is over £250,000 Max does not qualify for a total exemption on his business assets. We will now calculate the capital gains tax on the above and check for marginal relief which will limit the tax to half the difference between the sales proceeds of the business assets minus £250,000. Capital gains

Capital gains tax on business assets qualifying for relief

Marginal relief limits tax to half the difference between £260,000 � £250,000 which is £5,000.

Max�s capital gains tax on his business assets qualifying for relief is limited to £5,000.

Gains on the disposals of assets not qualifying for relief

Max�s capital gains for 1998/99

Note 1

If a taxpayer claims retirement relief he is not entitled to an exemption for that year.

Company

If you run your business through a company you will not be selling assets, as the company owns the assets. You will be selling shares. The value of the shares are backed by the assets in the balance sheet. The sale of business assets to your children are exempt. Remember that all the assets in the balance sheet might not be business assets, some of the assets could be investments, which do not qualify for this relief.

The sale of business assets to third parties is exempt if the sales proceeds is below £250,000. When we are dealing with a company we will have only one sales proceeds, the sales proceeds of the shares.

How will we know what the sales proceeds of the business assets is?

To find the sales proceeds of the chargeable business assets we must use the following formula:

When we run our business through a company there are three conditions to ensure we qualify for retirement relief.

Those conditions are:

(i) the taxpayer must have held the shares in the company for ten years;
(ii) the taxpayer must be a working director for a period of not less than ten years. During that ten year period he must have been a full time director for five years;
(iii)the company must be a family company for at least ten years.

A family company is one where the individual concerned owns:

(i) 25% or more of the voting power; or
(ii) 10% of the voting power and at least 75% of the voting power (including his own 10%) are controlled by members of his family.

Family is defined as meaning the individuals � spouse, brother, sister, ancestor or lineal descendent of the individual or his spouse.

Let�s take an example to explain retirement relief when you are running your business through a company.

Nuala who is aged 56 owns 80% of a successful trading company. She originally purchased her shares in July 1984 for £3,000. She has worked full-time in the company since 1985. On 1/10/98 she sold her shares for £360,000.

The balance sheet of the company at 30 September 1998 was as follows:

All assets per balance sheet are stated at their market value.

You are required to calculate Nuala�s capital gains tax for 1998/99 assuming she is single and has made no other disposals during the year.

Solution

Step 1

Does Nuala qualify for retirement relief:

(a) is she over 55 years � Yes;
(b) does she meet the three conditions necessary when selling shares in a company:

(i) did she own the shares for ten years � Yes;
(ii) did she work in the company � Yes;
(iii)is it a family company � Yes as Nuala owns over 25% of the voting rights.

Step 2

Calculate the sales proceeds attaching to the chargeable business assets and if this is below £250,000 the sale of the business assets is exempt.

Formula:

The sale of the business assets is not exempt as the sales proceeds exceeds £250,000. We must now check for marginal relief.

Gain on the sale of the shares

Nuala does not qualify for the annual exemption for 1998/99 as she has claimed retirement relief

Period of ownership

In determining the period of ownership and the period of a directorship for the purposes of this relief the following additional rules apply:

Ownership by spouse

The period of ownership of the taxpayer�s spouse is taken into account as if it were a period of ownership by the taxpayer.

Replacement of assets (rollover relief)

Where assets (which qualify for rollover relief) are sold and the proceeds are reinvested in further qualifying assets, the period of ownership of the assets which were sold is taken into account as if it were a period of ownership of the new assets.

Transfer of a business to a company

Where the qualifying assets are shares in a family company and the individual concerned had previously transferred his business to the company wholly or partly for shares in such a manner as to qualify for the capital gains tax relief on the transfer of a business to a company. The period of ownership of the business transferred is taken into account as part of the period of ownership of the shares in the company. In these circumstances a period of ownership of the business transferred is also regarded as a period during which he was a full-time working director of the company.

Death of a spouse

Where the taxpayer�s spouse dies the period during which the deceased spouse was a full time working director up to the date of death of the spouse is taken into account as part of the taxpayers own period of full-time directorship of the company.

Let�s take another example

Tony who is aged 58 is a sole trader. On the 1/1/94 he decided to retire and gave his business to his son Ken. Details of his assets at the first of January 1994 are as follows:

Ken sold the business in March 1999. The sales proceeds of his assets are as follows:

You are required to calculate the capital gains tax implications of the above transactions.

Solution

Tony 1993/94

Tony will qualify for retirement relief as he is over 55 years and a sole trader and has owned the assets (except plant and machinery) for 10 years. Tony will qualify for a total exemption from capital gains tax as he has only business assets and the disposal is to his son Ken.

Ken 1998/99

As Ken has sold the business within 6 years he will be open to a double capital gains tax liability.

(i) his own liability on the disposal of the business in March 1999:

Stock and debtors are current assets and not chargeable to capital gains tax.

Summary

(ii) Ken will also be liable for the capital gains tax Tony would have incurred if Section 599 (disposal to children) had not applied. Tony would still be entitled to Section 598 relief � disposal to third parties. The disposal of the business assets would not have been exempt as the sales proceeds exceeded £250,000. Check for marginal relief.

Tax should be limited to half of the difference between £320,000 � £250,000 which is equal to £35,000.

Ken�s total capital gains tax for 1998/99