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Thursday, 18th April 2024
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Retirement relief Back  
Retirement relief has little to do with retirement but it is nonetheless a relief. Its main role is in passing on family businesses from one generation to the next.
Retirement not necessary
Employees normally retire from their employment. Business people tend rather to fade away. Retirement is less commonly a concept used in relation to a business person than it is in relation to an employee. Nonetheless, in practice retirement relief is a relief for business persons only.

It has nothing much to do with retirement. It is a relief from capital gains tax on disposing of an interest in a business or ‘family’ trading company but it is available without regard to whether or not the person claiming it has retired, or has any intention of retiring, from business.

The sole connection with the concept of ‘retirement’ is that the person claiming the relief must be aged at least 55 years. In other words, he must be at an age when he might reasonably be thinking of retirement, whether he is doing so or not.

Two forms of relief
The relief takes two forms. On a transfer of qualifying assets (which can be trading assets or shares in a ‘family’ company to the extent that it is a trading company) no capital gains tax will arise where the transfer is to a child of the transferor. If the child disposes of the asset within six years of the transfer, the relief can be withdrawn. If it is withdrawn the tax is paid by the child and not by the parent.

Alternatively, no capital gains tax would arise on the transfer of similar assets to a person who is not a child of the transferor where the proceeds do not exceed ?375,000. That limit is the aggregate limit in respect of all transfers of qualifying assets after the taxpayer reaches the age of 55 years. Where initial transfers do not exceed that limit, the relief may be initially available on those disposals. Where the subsequent disposals bring the aggregate of disposals over the limit, the earlier relief is clawed back.

The limit to the total of disposals that can qualify for relief, where the transfer is not to a child, is relatively low and as a result that element of the relief is not, perhaps, of great significance.

However, if a person is indeed lucky enough to be selling their business assets on the approach to their 55th birthday, they can achieve a useful amount of relief by postponing the sale of assets worth up to ?375,000 until immediately after their 55th birthday, having disposed of all other business assets prior to the birthday. The disposals in the years prior to the 55th birthday are not taken into account in determining whether or not total disposals exceed the ?375,000 limit and accordingly do not result in the relief being denied or clawed back.

Deficiencies in the relief
A business person who moves between businesses over his career could encounter problems in obtaining the relief. Where the relief is in relation to shares in his family trading company, it is necessary that he should have owned the shares for at least ten years prior to the disposal on which he is claiming relief. It is also necessary that he should have worked for the company for a ten year period at least, and that at least five of those years should be full-time working.

A similar problem could be encountered by a business person who works in several businesses which are not held in a group structure. Such a person may find that he/she is unable to demonstrate that he has worked full time for any of those businesses and thus find relief unavailable in relation to all of them.

A businessman who sells a business and then sets up another business later in his career may find that when the time comes to pass on that business to his children, he has not yet owned that new business for at least ten years.

Such restrictions make little sense in the context of the relief.

Traps
A problem can also arise where a business is successful and generates surplus assets. In such a case typically the surplus assets will be held as investments within the family company. Gains on disposals of shares in the family company will not attract full retirement relief where part of the assets of the company consist of investments as opposed to trading assets. The status of large cash balances can be quite ambiguous in this context - are they mere investments, or the cash resources of a trade?

A business person can also find that they have unwittingly sacrificed the possibility to pass by means of gift/sale their shareholding to their children free of CGT, by diluting their percentage shareholding below a certain level. That level is 25 per cent, where the company is not controlled at least as to 75 per cent by family members, and is 10 per cent where the company is 75 per cent controlled by family members.

For example, assume a trading company is owned in equal shares by four unconnected individuals. If a fifth investor is permitted to take up shares in the company, each of the existing investors will find that they have sacrificed retirement relief possibilities in relation to their shareholdings for the future. They no longer hold at least 25 per cent of the shares.

Plan a decade ahead
Where a person owns trading assets or a trading company, retirement relief planning is something he should move up his agenda. Because of the significance of whether disposals occur before or after the 55th birthday, and the necessity to have the correct period of ownership and history of full-time working, planning for the relief may have to commence up to a decade ahead of a relevant disposal.

Shaun Murphy is a Partner in KPMG.

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