Why gifts of farming company shares can lead to a CGT bill

Gifts of shares in farming companies could lead to a capital gains tax (CGT) bill even though no money has changed hands, warn advisers.

Some farming families have found out to their cost that checking the tax implications of such a gift before it is made would have been time well spent, says Mike Butler, a partner in accountant PKF Francis Clark.

See also: IHT planning must include an all round review of assets

Many farming businesses have been run as a company for decades, and the current 19-25% corporation tax rate on profits makes this attractive compared with income tax rates of up to 45% plus national insurance costs.

The changes to inheritance tax (IHT) reliefs in the two most recent Budgets have prompted much restructuring, often involving gifts of assets, including company shares.

Gifts to connected people

However, Mike points out that when individuals make gifts to connected people, typically family members, HM Revenue and Customs requires such transfers to be treated as a disposal at market value, even if no cash is changing hands.

Where a company has grown over many years, the capital gain can be significant.

Asset gifts can usually attract holdover relief from CGT, which effectively defers payment of the tax until that gift is turned into cash, if or when its new owner sells the asset.

However, where a company has some non-trading activity, such as commercial lets, residential lets or other investment assets, either full or partial holdover relief is at risk.

Trading activity test

CGT relief on the transfer of shares in a company can only be claimed if the company’s activity is at least 80% trading.

This is measured by the split of asset value between trading and non-trading elements but also takes into account turnover, net income and management time spent on the different elements.

Unless that 80% trading test is passed, no holdover relief is available on the gift of shares, resulting in a CGT liability on the full gain at the current rate of 24%, payable by the donor by 31 January following the end of the tax year in which the gift is made.

“Most people wouldn’t have the cash to pay this tax,” says Mike, who points out that it is relatively easy to transfer shares through a deed of gift and a stock transfer form and, as a result, sometimes gifts are approached in a casual manner, with the legal documentation taking precedence, rather than tax being considered in advance as part of the process.

Restriction of relief

Even when the 80% trading test is passed, holdover relief is restricted if there is any non-trading activity. The tax impact of the restriction is usually calculated by taking into account the gain on the shares and the proportion of the company that is not trading, when considering the above tests (see below).

Discretionary trust option

A variant of holdover relief is available when shares that qualify for business IHT reliefs are transferred into a discretionary trust, with the option to later distribute these out of that trust to individuals.

Although there is a requirement to claim it, CGT holdover relief on gifts into a discretionary trust is unrestricted and so can cover the whole gain, irrespective of the 80% trading test.

Mike points out that in the case of a married couple or civil partners, under the new rules, they may gift £2.5m of assets each into a post 5 April 2026 lifetime discretionary trust and still each have 100% relief from IHT on £2.5m of other assets through agricultural property relief or business property relief.

In other cases, business restructuring through medium- or long-term planning may allow a rebalancing of assets so that the business in which shares are to be gifted is entirely trading in nature.