You recently retired from your company having sold your shares in it for a large capital gain. The firm has now offered a consultancy role on a self-employed basis. If you accept the offer might it trigger an extra tax bill?
Background
You started your family company 30 years ago. You retired in early 2022 and sold your shares back to the company. The resulting capital gain was approximately £800,000. Business asset disposal relief (BADR) will mean your tax bill on this will be around £79,000. However, recently the company asked you to help with a one-off deal for which you’ll be paid £50,000. You’ve been warned this might trigger anti-avoidance rules that could cost you over £300,000 in extra tax.
Anti-avoidance traps
There are potentially three different anti-avoidance measures that can affect the right to BADR. These are the: “phoenixing” targeted anti-avoidance rules; breach of purchase of own shares conditions; and transactions in securities rules. The effect of any of these would be to make the gain you made liable to income tax at rates up to 39.35%, i.e. the dividend tax rates would apply instead of capital gains tax (CGT) at the BADR rate of 14% (10% until 5 April 2025).
Phoenixing
The anti-phoenixing rules apply if someone claims BADR and within two years becomes involved in a business of a similar nature. The good news for you is that these rules are only applicable if the capital gain arises from the winding up of a company. As you sold your shares we don’t need to look further at these rules.
Purchase of own shares
The rule can apply if a person sells their shares to the company and one of the reasons is tax avoidance. The avoidance doesn’t have to be part of a scheme to dodge tax just one of the main motives. Primarily the rule applies where the sale of the shares was not made for the purpose of the company’s trade. In your case your company had obtained advance clearance from HMRC that the anti-avoidance rules didn’t apply.
Trap. HMRC’s clearance is only given on the basis that all relevant facts pertaining to the sale are disclosed.
Disclosure
The concern for our subscriber is that the money she’ll be paid for the new work will come hard on the heels of the sale of her shares, and wasn’t disclosed to HMRC.
Tip. Because the new work was not known about when the sale of shares was agreed it shouldn’t break the conditions for CGT treatment of the purchase of her shares, which in turn means she won’t lose BADR . However, to pre-empt and prevent trouble with HMRC the company should contact the office that gave the clearance and explain the position backing it up with evidence to show that the arrangement was not linked to the share buy-back.
Transactions in securities (TIS)
These rules are wider in their application. Broadly they can apply where a capital transaction, such as a sale of shares, is made in preference to the person concerned receiving income to avoid tax. Our subscriber need not be concerned because HMRC considers the TIS rules at the same time as the purchase of own shares conditions. Again, because the new work was demonstrably not linked to the share purchase it can’t be part of an avoidance arrangement.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.