Tax liability on company closure from inherited shares

CabbageMan44

Hoping someone can help me on this one, I've had a look around the net but just can't work it out. My father was a 50% shareholder of a company with his business partner. Sadly he passed 5 years ago and the company is now finally set to close.

My father's Will distributed his shares in the business to my mother (50%), myself (25%) and my sister (25%).

The company has a property asset that has been sold, which over the years has had a significant gain in value. Firstly would this gain be subject to corporation tax liability on the company? 

When the company does close and the proceeds are distributed what tax liability would I have? I was reading that death on shares can pass free of Inheritance Tax? would I be subject to CGT? Also - what liabilities would my mother have and is there any way to reduce the tax owing?

Thanks

MattMattMattUK

CabbageMan44 said:

Hoping someone can help me on this one, I've had a look around the net but just can't work it out. My father was a 50% shareholder of a company with his business partner. Sadly he passed 5 years ago and the company is now finally set to close.

My father's Will distributed his shares in the business to my mother (50%), myself (25%) and my sister (25%).

The company has a property asset that has been sold, which over the years has had a significant gain in value. Firstly would this gain be subject to corporation tax liability on the company? 

The company would pay Corporation Tax on the profit, not individually on the sale of the asset. 

CabbageMan44 said:

When the company does close and the proceeds are distributed what tax liability would I have? 

It depends how things are handled. If they are distributed as dividend then you pay dividend tax at the relevant rate. 
https://www.gov.uk/tax-on-dividends

If you sell the business or wind it up then you can distribute the assets and pay the lower 10% tax rate. 
https://www.gov.uk/business-asset-disposal-relief

CabbageMan44 said:

I was reading that death on shares can pass free of Inheritance Tax?

That very much depends on the nature of the inheritance, but usually, no. 

CabbageMan44 said:

would I be subject to CGT?

That depends on the way you distribute the funds. 

CabbageMan44 said:

Also - what liabilities would my mother have and is there any way to reduce the tax owing?

That depends on how much she earns and how much she get from the disposal of the business. 

CabbageMan44 said:

and is there any way to reduce the tax owing?

The best way would be to use the Business Asset Disposal Releif which lower the tax rate to 10%, however depending on the value of the funds and your tax thresholds that could be higher than the 8.75% base dividend rate. Whatever you do, do not engage in some convoluted scheme, do it properly. 

CabbageMan44

Thanks for the reply

Company is being wound up, I just wasn't sure if I fell into BADR with me inheriting the shares.

Disposal proceeds at a guess would be 500k to 700k. 

I can offset my income for this tax year with a pension payment to bring myself back to the basic level, so hopefully that will remain at 10%. I was just wondering about my mother as she is a pensioner - is there a way her shares could be gifted to myself and my sister?

uknick

If the shares were to be gifted to a related party, e.g. children, they are deemed to be transferred at current market value.  Therefore, you would need to determine value at time of your father's passing and value at time of your mother disposing of the shares to work out any possible gain

How do you work out a value?  Very good question.  At its simplest you could divide the net value (assets less liabilities) of the company by the number of shares in existence at the time the valuation is made.  For example, if the company has a net value of £1m and you have 100,000 shares in existence you'd get a value of £10 per share.  But, there are many ways, and in most cases far more complex, to value shares in a closed company.

I strongly suggest you employ an accountant to work out the most tax advantageous way of closing down the company.  

MattMattMattUK

CabbageMan44 said:

Thanks for the reply

Company is being wound up, I just wasn't sure if I fell into BADR with me inheriting the shares.

I should have asked, were you all made directors? If not it may actually make sense to make yourself directors, wait two years and then wind up the company so you can benefit from BADR.

CabbageMan44 said:

Disposal proceeds at a guess would be 500k to 700k. 

Remember to account for the Corporation Tax first. However on that basis you and your sister would be getting £125k and your mother £250k, that would mean that if you had no other income your and your sister's liability would be £12.5k and your mum's £250k using BADR, without BADR you can double those (CGT at 20%), you liability under dividend tax would be far higher and really not the route you want to take. 

CabbageMan44 said:

I can offset my income for this tax year with a pension payment to bring myself back to the basic level, 

You could, but factor is putting the money into your pension the right thing to do, as it would lock the money away. 

CabbageMan44 said:

I was just wondering about my mother as she is a pensioner - is there a way her shares could be gifted to myself and my sister?

There could be, but you would still be liable for the CGT at 10%/20%. 

Grumpy_chap

What value was assigned to the shares at the time of the Father's passing?  That should have been done for the purposes of IHT at that time.