Max ceased trading two years ago, and is now about to move overseas. He would like advice on the capital gains tax (CGT) implications of the disposal of two assets previously used in his unincorporated business, and the inheritance tax (IHT) implications of gifting one of them.
Max:
– Has always been UK resident and domiciled.
– Is widowed and has one daughter, Fara.
– Is a higher-rate taxpayer.
– Makes disposals each year to use his annual exempt amount for capital gains tax.
– Has made one previous lifetime gift to Fara on 6 May 2015, which resulted in a gross chargeable transfer of £194,000.
Max – unincorporated business:
– Max operated as a sole trader for many years, but ceased trading on 31 May 2016.
– Max still owns office premises and a warehouse which had been used exclusively in his business until 31 May 2016.
– Max now wishes to dispose of these buildings prior to moving overseas.
Proposed gift of the office premises:
– Max is proposing to gift the office premises to Fara on 30 June 2018.
– Max acquired the premises on 1 April 2010.
– Since 1 June 2016, the premises have been let to an unconnected company.
– The market value of the premises in June 2018 is £168,000, which exceeds the original cost.
Max – move overseas:
– Max has decided to move overseas for a period of two and a half years commencing on 1 November 2018.
– Max does not intend to return to the UK at all during this period.
– Max will return to live permanently in the UK on 30 June 2021.
– Max is not entitled to use the split year treatment for determination of his residence status in any tax year.
Proposed sale of the warehouse:
– The warehouse was acquired on 1 August 2014 for a cost of £72,000.
– On 1 December 2013, Max had sold a small showroom for proceeds of £78,000, which gave rise to a chargeable gain of £16,000.
– Max made a claim to defer the gain against the acquisition of the warehouse.
– Max has received an offer of £84,000 for the immediate sale of the warehouse in June 2018.
– An alternative buyer has offered £90,000 for the warehouse, but will not be able to complete the purchase until June 2019.
Required:
In respect of the proposed gift of the office premises to Fara on 30 June 2018:
(i) Advise Max whether or not capital gains tax (CGT) gift relief will be available, and if so, to what extent.
(ii) Advise Max of the maximum potential inheritance tax (IHT) liability, and the circumstances in which this would arise.
Max
(i) Availability of gift relief in respect of the gift of the office premises
The office premises are eligible for gift relief as they were used for the purpose of Max’s trade. However, as they ceased to be used in the business on 31 May 2016, the proportion of the gain to be held over is restricted to the gain on disposal x period of business use/total period of ownership. Therefore the proportion of the gain eligible for gift relief is 74/99 ((1 April 2010 – 31 May 2016)/(1 April 2010 to 30 June 2018)). The relief will only be available if the donee, Fara, is UK resident.
(ii) Maximum potential inheritance tax (IHT) liability in respect of the gift of the office premises
No IHT is payable at the time the gift is made, but a liability may arise if Max dies within seven years of making the gift.
Business property relief is not available as this is a gift of an individual asset which has been used in an unincorporated sole trader business, rather than the gift of the business itself. However, annual exemptions are available for the tax years 2018/19 and 2017/18, such that the gross chargeable value of the gift will be £162,000 (£168,000 – £3,000 – £3,000).
Max has made one prior gift, on 6 May 2015, which will use part of his nil rate band if he dies before 6 May 2022. Taper relief will be available if Max dies after 30 June 2021 (three years after the date of the gift on 30 June 2018), so the maximum potential IHT liability will arise if Max dies before this date.
The maximum potential inheritance tax liability is therefore £12,400 (£162,000 – (£325,000 – £194,000) x 40%) and will arise if Max dies on or before 30 June 2021.
Explain the effect of Max’s period of living overseas on his UK residence status for all relevant tax years, and advise him of the CGT consequences of the sale of the warehouse (1) in June 2018, or alternatively (2) in June 2019.
Note: No calculations are required for this part
Effect of Max’s two-and-a-half-year period overseas on his UK residence status and the capital gains tax (CGT) consequences on the sale of the warehouse
Max will leave the UK on 1 November 2018. As Max was resident in the UK for one or more of the previous three tax years, and he will spend more than 91 days in the UK in the tax year 2018/19, then he will NOT satisfy any of the automatic overseas tests.
Max WILL satisfy the first automatic UK residence test in 2018/19 as he will spend 183 days or more in the UK in that tax year.
In the tax years 2019/20 and 2020/21 Max will satisfy the first automatic overseas residence test as he is in the UK for 16 days or less in each tax year.
In the tax year 2021/22 Max’s return to live permanently in the UK from 30 June 2021 means that he will not satisfy any of the automatic overseas residence tests, but will satisfy the UK residence test as he will spend 183 days or more in the UK in that tax year.
(1) Sale in June 2018
As Max is resident in the UK in June 2018, the disposal will give rise to a chargeable gain in 2018/19.
(2) Sale in June 2019
Disposals of assets made by non-UK resident individuals are not chargeable to CGT in the UK. However, Max will be regarded as a temporary non-resident, as his period of non-residence will be less than five years, and he has been UK resident for at least four of the seven tax years prior to the tax year of departure. Accordingly, any gains made in the period of non-residence in respect of assets held prior to Max’s departure, and disposed of while he is overseas, will become chargeable in 2021/22 (the tax year of his return).
Explain whether or not entrepreneurs’ relief will be available on the sale of the warehouse, and calculate the increase in Max’s after-tax proceeds if he sells the warehouse in June 2019 rather than in June 2018.
Availability of entrepreneurs’ relief on the sale of the warehouse
The sale of the warehouse will satisfy two of the conditions for entrepreneurs’ relief in that it was in use within Max’s business at the date of cessation, and the business had been owned by Max for at least one year prior to cessation. However, the third condition, that the disposal must be within three years of the date of cessation, will only be satisfied if the disposal takes place before 1 June 2019. Accordingly, if the sale takes place in June 2018, entrepreneurs’ relief will be available, but if it does not take place until June 2019, it will not.
Sale in June 2018
If the sale of the warehouse takes place in June 2018, this will give rise to a chargeable gain of £22,000 (£84,000 – £62,000 (W))
As Max will be able to claim entrepreneurs’ relief in respect of this chargeable gain, the after-tax proceeds will be £81,800 (£84,000 – (£22,000 x 10%)).
Sale in June 2019
If the sale of the warehouse is delayed until June 2019, this will give rise to a chargeable gain of £28,000 (£90,000 – £62,000 (W)) in 2020/21.
As Max will not be able to claim entrepreneurs’ relief in respect of this chargeable gain, the after-tax proceeds will be £84,400 (£90,000 – (£28,000 x 20%)).
The increase in after-tax proceeds is therefore £2,600 (£84,400 – £81,800)
Working:
