Financial Avoid the tax traps
With many practices looking at providing dental care by trading through a company, Tricia Halliday looks at pitfalls and advantages associated with the sale or transfer of company shares
S
ince the removal of restrictions on Dental Bodies Corporates (DBCs) announced in 2005, a growing number
of practices have chosen to provide dental care through the medium of a company. There can be a number of advan-
tages in trading through a company, the most notable being the relatively low rate of tax. However, there are disadvantages to incorporation which should not be overlooked and in previous articles Stephen Neville highlighted the dilemma faced by DBCs – in particular the importance of registering on NHS lists and the potential loss of grants and training allowances. The corporate entity can also offer
the owner a relatively simple method of selling the practice or passing it on to a successor. The sale of shares in a company is far simpler and cleaner than the alternative of selling the business in a piecemeal fashion.
Share sale The sale of shares will be subject to Capital Gains Tax (CGT). The gain on sale (the proceeds received less the cost of the shares) will be taxed at either ı0 per cent where Entre- preneur’s Relief (ER) is available or ı8 per cent/28 per cent depending on the seller’s personal tax position. The ı0 per cent rate afforded by
ER is available for lifetime gains of up to £ı0 million for each taxpayer. As with most tax reliefs, certain conditions must be satisfied. A shareholder can qualify for ER
on the disposal of all or part of his shareholding if, throughout the ı2 months prior to the share disposal: • the company was a trading
company; and • the company was the indi-
vidual’s ‘personal company’ where the individual owned at least 5 per
when the shareholder wishes to gift his shares in a company to a relative or business partner, say as part of a business succession plan. The gift is potentially liable to Capital Gains Tax (CGT) at the date the shares are gifted and to Inheritance Tax (IHT) on the death of the transferor. As highlighted above, ER may be
cent of the company’s ordinary share capital and was able to exer- cise at least 5 per cent of the voting rights; and • the individual was an officer or
employee of the company. The last two conditions are not
particularly onerous and can easily be given effect with careful plan- ning. The first condition carries a little more risk. Rather unhelpfully, there is no
statutory interpretation of ‘trade’. If a company is conducting commer- cial activities, with a view to making a profit, then HMRC should accept that it is trading. A claim for ER may be denied where a company’s activi- ties include ‘to a substantial extent’ activities other than trading. HMRC guidance defines ‘activi-
ties’ to include ‘the making and holding of investments (including cash). Substantial is defined as ‘more than 20 per cent’. To get straight to the point, where a company holds ‘too much’ cash i.e. more than 20 per cent of its total assets – ER may be denied and the seller subject to higher rates of capital gains tax.
Gift of shares There are similar considerations
available to reduce the amount of CGT payable and Business Property Relief (BPR) is available to miti- gate the IHT charge subject to the following three conditions being satisfied. The shares must: • be ‘relevant business property’ • have been owned for a minimum period of two years • not be subject to a binding
contract for sale at date of transfer. Problems may arise when consid-
ering the first condition. Shares in an unquoted trading company are treated as ‘relevant business property’ and benefit from ı00 per cent relief. However, provisions within the
IHT Act will deny relief where the business in question “consists wholly or mainly of making or holding investment”. The phrase ‘wholly or mainly’
ABOUT THE AUTHOR
Tricia Halliday is a partner at Martin Aitken & Co. Tricia is contactable at
ph@maco.co.uk by telephone on 0141 272 0000. You can find out more about Martin Aitken & Co by looking at their website
www.maco.
co.uk
should be interpreted as meaning more than 50 per cent. Hence cash in excess of 50 per cent of the total value of the company’s assets may give rise to problems. Tax planning is the key. Share- holders considering a sale or transfer should start planning at least one year before the proposed sale or transfer date. If cash balances are high, steps should be taken to reduce the levels of cash. Invest- ment in new plant and machinery, company pension contributions and dividend strategies are possible courses of action. If you are considering a share sale
or transfer, speak to your tax advisor as soon as possible.
Scottish Dental magazine 75
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