Where your clients are transferring their business on to the next generation, Business Relief for Capital Acquisition Tax purposes is often claimed on such a gift or inheritance situation.

The relief can be a valuable relief as it reduces the taxable value of qualifying business assets to 10% of their full value. Section 90 – 102A CATCA 2003 provides the conditions which must be satisfied in order to claim this relief.

Whilst the clawback period of 6 years in respect of such a relief claim is often referenced, the work involved in managing this clawback period is often not fully appreciated. This is especially true where Business Relief is claimed in respect of shares in a company. It is regularly understood that a clawback of the relief would only arise in circumstances where the shares are disposed by the beneficiary. However, the clawback can arise in other circumstances too.

We have outlined below some key items to be mindful of when managing this 6-year clawback period for Business Relief on a gift or inheritance of shares in a company.

Clawback of Business Relief on a gift or inheritance of shares

The relief will be clawed back if:

1. The business/shares cease to qualify as “relevant business property”.

Or

2. The recipient sells or redeems the shares within 6 years of receiving the gift/inheritance and does not replace them with other qualifying business property within 12 months.

When determining if a gift/inheritance of shares retains its business property relief status, it’s essential to evaluate the tests for business relief at that point in time, to see would the shares still qualify if they were gifted/inherited at that date based on the rules (but ignoring the minimum period of ownership requirements and the working time requirement where a 10% holding existed). This re-evaluation should occur on an ongoing basis over the 6-year period.

The key point here is that the company cannot start purchasing non-trade assets or use cash for non-trade purposes during this 6-year period. In addition, the company cannot start accumulating excess cash and investing it as this would be considered an excepted asset. In such circumstances, were this to occur, there would be a clawback of the Business Relief claimed. The clawback of the relief would be based on the part of the relevant business property which no longer qualifies.

Therefore, to ensure that no clawback arises during the 6 years after a gift or inheritance of shares on which a Business Relief claim was made, the following should be monitored:

• The Company should not purchase non-trade assets such as investment property or other investments.
  
  
• The Company should continue to invest in trade assets over the 6-year period and where possible, use cash which existed at the time of the gift/inheritance to acquire such assets.
  
  
• The Company should ensure that the cash existing as part of the relief claim is subsequently used for business purposes to avoid a situation where this cash could be considered excess cash and therefore actually an excepted asset.
  
  
• The Company should ensure that cash is maintained in current accounts for the trade and not transferred into deposit accounts where again it could be considered excess cash and as such an excepted asset.

It is often the case that the management of the Business Relief claim stops after the claim has been made on an IT38 return and that a clawback would only arise where the shares are actually disposed of by the beneficiary. However, as outlined above, it is important that the full 6-year clawback period is managed for your clients.

As you can see, effectively managing the clawback period for Business Relief can be complex. When a transfer to the next generation is being considered the position for both the retiring shareholders and the beneficiaries should be considered in conjunction with one another (and not viewed in isolation) as it can be possible to structure a transition in a manner which benefits all parties.

If your clients need help in this area, our OmniPro Tax and Legal team is here to provide you with transition advice on the transfer of business for both the disponers and beneficiaries in a tax-efficient manner. Please do not hesitate to contact us for a consultation.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.