Passing along your family business: how does gift hold-over relief work?
Family businesses are a cornerstone of the British economy. For all the large, multinational businesses that exist, there is a whole host of smaller, family-run firms that keep the country moving. There are 4.8 million family businesses in the UK and together they generate over a quarter of the country’s GDP.
You might be one of them. And no matter what trade you find yourself in, all family businesses come to the same point in their journey. How do we pass the business along to the next generation? You might think it’s time to retire, or perhaps you want to be less involved. Either way, the idea of passing along your business might fill you with dread.
Will it be complicated? What tax will you have to pay? Thankfully, there are ways you can simplify the process and reduce your tax obligations. Let’s look at how gift hold-over relief can help.
What is gift hold-over relief?
Gift hold-over relief exists for purposes such as this. In short, it allows you to pass on business assets – and their associated tax liability – to another party without incurring any costs yourself. As the seller, it means you do not have to pay any Capital Gains Tax (CGT) when you give these assets aways.
You don’t have to pay CGT when giving away assets unless you’re selling them for less than they’re worth or you stand to make a gain. This might be relevant if you’re setting yourself up for retirement.
Here’s how it works. When selling assets, you have to do so at market value. You then have to pay CGT on any profit. When giving your assets away, it is still presumed you are doing so at market value. Say you give your part of the business to your child. When you started, those shares were worth £10,000. Now they’re worth £100,000. Usually, you would pay CGT on the £90,000 profit. But as you’re giving them away, you and your child can agree to claim gift hold-over.
This means, for the purpose of the handover, you are doing so at the original value – in this case, £10,000. So you don’t have to pay tax on any profits. Instead, your child now inherits this profit and will have to pay tax on all of it were they to sell it themselves. In this example, they might sell when they’re worth £120,000. With the hold-over, they would pay CGT on their £120,000 minus your £10,000 – so taxed on £110,000.
The finer details
There are a couple of exemptions. If you’re giving away business assets, you must either be the sole trader/owner, or have at least 5% of voting rights in a company. This is known as your ‘personal company’. The assets you give away must also be used in the business or your personal company. So no giving away your car under this pretense.
This also only works if all parties are on board. That’s why giving away to a family member might be easier. While you could give your assets away to any third party, they would have to agree to take on the tax hold-over.
You should also be certain your family member wants the responsibility. And if you plan on staying part of the business on an advisory basis, you want to be sure your recipient is capable of keeping the company afloat.
By taking advantage of gift hold-over relief, you can ensure your family business stays where it should – within the family. It means you can cleanly exit the business without incurring any tax and rest assured everything is in safe hands.
If you have any tax or accounting concerns, get in touch with the experts at Big Hand. We have the knowledge to guide you through any difficult business times. Get in touch with us on 0161 327 2911.