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bigduckontax, Accountant
Category: Tax
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3 of us own a rented commercial building in a Ltd Co. Loan

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3 of us own a rented commercial building in a Ltd Co. Loan will be paid off in 1-2yrs. Building cost £287K, value £325K now. Looking at succession planning - have noted entrepreneurs relief, and CGT. Share capital £1.1K, shareholder funds £237K. Thinking of giving small tranches of shares to my 4 children (below annual CGT threshold for me) or will Entrepreneurs Relief avoid me / us paying very much tax anyway?

Hello, I'm Keith and happy to help you with your question.

Dribbling out assets is a well known method of tax avoidance and perfectly legal. However gifts create a Potentially Exempt Transfer (PET) in your estate for Inheritance Tax (IT) purposes. PETs run off on a taper over seven years and in the event of your demise are the first to suffer IT. If your estate cannot meet the IT it cascades down to the beneficiaries for immediate payment.

However if stocks and shares are involved the PET position remains. If you are selling off part of the company, providing the Articles permit such sales, then each disposal would generate a CGT liability depending on the gain based on the current market and acquisition values. You have an Annual Exempt Allowance AEA) of 11K so providing your disposal's gains do not breach this there would be no CGT liability. If you go over that then you may be able to apply Entrepreneur's Relief (ER), but remember you must be in at the ground floor to be entitled. ER reduces the tax on any gain to 10%. Keep within the AEA and you have no problem anyway.

I do hope I have thrown some light on your conundrum.

Customer: replied 3 years ago.

Thanks for that. It is helpful. I remain a little unclear re what CGT would be chargeable on if I gift Ltd Co shares to my children - is it the difference in value between what I "bought" the shares for (a share of the £1.1K share capital - £1 a share) and the current "share price" (my share of the current company value of £237K - approx. £215 a share, a massive share price appreciation) or is it only my share of the £38K building appreciation over what we paid to build it?

Right, I see you have grasped that a capital gain has been made even if you did gift shares. Your acquisition price was say 0.37K. Your disposal price for your 370 shares was at 215 x 370 = 79550. Let us say you gave your children 10% of your shares, disposal price would be 8K, give or take. Capital gain is 8K - 0.037K = say 79K less the AEA of 11K gives 68K which, with ER which we can assume to be available, some 6.8K tax would need to be paid at a rate of 10%; ouch!
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Customer: replied 3 years ago.

Thanks. That's what I thought. I possibly will gift out 10-12% of shares annually for a few years on this basis.

Yes, just a few careful sums to keep within the AEA.

Thank you for your support.