Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the tax consequences of a director gifting a property to her nursery business.
The tax query
‘A director of a limited company in which she has owned more than 5% of the shares for at least two years, owns a residential property that has been used by the company exclusively for the purpose of its children’s nursery business.
The property was purchased in 1997 for £150,000 and extended at a cost of £200,000. The current market value is £650,000. Until 2010 it was the director’s principal private residence and it is intended to gift the property to the company. This will be a transaction between connected persons resulting in a disposal for CGT purposes at market value and thereby realising a gain of £300,000. It is considered that holdover relief under TCGA 1992, s 165 will apply. This relief is restricted where an asset has not been used exclusively for business purposes throughout the period of ownership and so the held over gain, based on complete years for the purpose of this question, would seem to be £300,000 x 14/27 = £155,555.
The balance of the overall gain would be exempt as covered by the principal private residence exemption. The company would be liable to pay SDLT [stamp duty land tax] on the market value at the date of gift.
Because no chargeable gain arises on the gift of the residential property there is no requirement to make a CGT return within 60 days of completion. Do readers agree with all this or are there any other matters to be considered in connection with any aspect of the proposed gift?’ Query 20,455 – Scholar.
Terry Jordan’s reply: The size of the client’s shareholding will be key for inheritance tax.
‘Scholar’s query relates to the transfer of a residential property owned by a director/shareholder to the limited company in which she owns more than 5% of the shares. Accordingly, it is her ‘personal company’ for the purposes of capital gains tax holdover relief under TCGA 1992, s 165. Part of the gain arising will be exempt under s 222 in respect of the period for which the property was her main residence plus the last nine months of ownership. As Scholar says, because no CGT is payable 60-day reporting is not required, and the disposal should be shown on the client’s self-assessment tax return. SDLT will be payable by the company.
So far so good, but Scholar may not have considered the inheritance tax [IHT] implications. We are told only that the client owns more than 5% of the shares in the company but not the actual size of the holding. Unless she has a control holding (together with her husband or civil partner’s holding if relevant) there would at present be no business property relief on the value of the property. Reference could usefully be made to Malcolm Gunn’s article ‘Woe, thrice woe!’ (22 August 2017) which includes the following section on IHT:
Transfer premises to the company
In theory, the inheritance tax position will be solved if the premises are given to M Vesuvius Ltd. The value of the premises is then reflected in the shares and, as long as the shares have been held for a two-year period, 100% business property relief will be available on them because this is a manufacturing business. However, … a further three woes are looming.
First, there is a stamp duty land tax liability whether the premises are gifted or sold.
If the premises are given to the company, it might be supposed that this will be a potentially exempt transfer (PET) for inheritance tax purposes to the extent that the other shareholders benefit. After all the value of their shares increases and the PET provisions allow for gift by virtue of which the estate of another individual is increased.
Unfortunately, this paraphrases the PET provision rather too much. If the gift increases the estate of another individual but is not a gift made directly to that individual, it is required that the value transferred is not attributable to property which becomes comprised in the estate of another person. With the gift to a company, the premises become comprised in the estate of the company, and so the gift cannot be a potentially exempt transfer. The result is that the gift is a chargeable transfer so there will be an immediate inheritance tax liability after the 50% relief.‘
The full article was published in Taxation magazine (issue 4970) and is available to subscribers here on the Taxation website.
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