Will I have to pay Capital Gains Tax?

Alison_B

I inherited some shares in a housing company and receive a nice little payout every september. However, this company is now in the process of being sold and we have heard news from another family member who attended the general meeting, that the company is issuing compulsory buyouts of the shares.

Now, I own 90 shares in this company and they are apparently offering £650 per share but the family member says I will need to pay 40% capital gains tax and I will have to get financial advice. I don't work, so I don't pay tax. Will I have to pay the 40%? Sorry if this sounds very naive but I am absolutely useless with financial matters.

dunstonh

Capital gains tax is paid on the gain.

In very simple terms, its the difference between the buying price and the selling price. You can offset a few things against it. In your case, the buying price would be the value that was allocated to them at the point you inherited them. The sale price is the price the company is buying them back for.

You have an £8500 allowance each tax year (increases annually). So the first £8500 of the gain will have no tax liability. The amount above this will have a 40% tax liability.

If you are married, you could transfer some of the some of the shares to your husband. He also has an £8500 allowance and there is no CGT liability on transfers between a legally married (and living together) spouse. So, in this case, the first £17000 would not have a tax liability with 40% for the remainder.

I knows its hindsight but it may help others reading this who are in a similar position; If you had PEP'ed or ISA'ed the shares when you got them, you would not be facing a tax bill now. Financial advice should have been sought from an independent financial advisor at that time. It would have saved you an awful lot of money. Also, the income that was payable over the years (until recently) would have been tax free too. Although in your case, you would have been claiming the tax back on the dividends until that was abolished a few years back.

edit: realised after finishing above that you were non-tax payer so tax liability, will not be fully charged at 40%. Indeed, it may not even reach the 40% band. Sorry about that, I started the post and then returned to it about 20 minutes later and forgot your tax status.

reddevilled

dunstonh wrote:

You have an £8500 allowance each tax year (increases annually). So the first £8500 of the gain will have no tax liability. The amount above this will have a 40% tax liability.

Sorry to be pedantic, but the OP says she doesn't work - I therefore assume she has little or no income (bar a bit of bank interest maybe).

So the gain above £8,500 will NOT be taxed at 40%, it will be taxed at 10%, then 20% (to use up the lower rate bands) and only then at 40%. Your 10% band is round about 2k, then the 20% is round about the next 30k.

Also, you may be entitled to taper relief depending on the length of period you have owned the shares.

cheerfulcat

Hi, Alison,

You will not have to pay CGT at 40% ( it will be charged at basic rate ) unless the *gain* takes you into the higher rate [income tax] band. Here's some info -

http://www.direct.gov.uk/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/BeginnersGuideToTaxArticles/fs/en?CONTENT_ID=4016313&chk=dyI1d%2B

Is this a private company? If so, there should be other tax reliefs available. In any case you will have taper relief, possibly indexation relief ( if inherited before 1998 IIRC ) ; if it is considered a business asset, you will have accelerated taper relief which can bring the *taxable* gain down to 10%. What you need is not a financial adviser; you need an accountant...shouldn't cost you more than £200 or so and will be well worth it.

HTH

Cheerfulcat

NeilW

£200 to fill in a capital gains tax form! Nice work if you can get it.

Alison,

You need the cost of the shares that were declared for probate when you inherited them, and of course the date you inherited them. From that you can calculate your gain.

I presume from the price of the shares that this is a private company, not one listed on the stock exchange.

NeilW

cheerfulcat

NeilW wrote:

£200 to fill in a capital gains tax form! Nice work if you can get it.

No, £85 per hour +VAT for a consultation and the filling in of the form, say two hours total...where there are reliefs to be claimed and a complicated form to fill in I think that someone who on her own admission is " absolutely useless with financial matters " would be well advised to see an accountant. Since the sum involved is considerable, I would think £200 to get the facts right would be money well spent.

Cheerfulcat ( not an accountant! )

simon_lse

You could also roll over the gain into the purchase of some new shares.

You will get taper relief, and from the sounds of it, you will get business asset taper relief.

I don't suppose you have any capital losses you could use to offset this gain (or use a neglidgable value claim if possible to create a capital loss)

Unfortunately, if you had taken advice from the start, they may have qualified for EIS and you would have obtained capital gains relief (subject to conditions)

You should seek advice from an accountant as there are could be many ways to offset some of this gain depending on your circumstances.

reddevilled

simon_lse wrote:

You could also roll over the gain into the purchase of some new shares.

You will get taper relief, and from the sounds of it, you will get business asset taper relief.

I don't suppose you have any capital losses you could use to offset this gain (or use a neglidgable value claim if possible to create a capital loss)

Unfortunately, if you had taken advice from the start, they may have qualified for EIS and you would have obtained capital gains relief (subject to conditions)

You should seek advice from an accountant as there are could be many ways to offset some of this gain depending on your circumstances.

Is it really worth rolling over the gain anyway (if it were available). If she can make use of her husband's annual exemption and her own then there could well be no tax to pay if full business asset taper relief is available.

The shares will be sold for 90 x 650 = 58500

say she gifts half to hubby = maximum gain of 29250 each

max taper relief = 25% chargeable = 7313 which is covered by annual exemption

Even without doing a transfer there could be nil or very little tax payable.

Just a thought :cool:

Ian_W

Alison_B wrote: Will I have to pay the 40%?

Alison,
The answer is NO. You will only pay 40% on any taxable gain that together with other earnings [employment, self employment, interest, dividends etc, etc] exceeds £39,385 in the 2005/6 tax year.

Ignore Dunston's post, majority of his clients are probably higher rate tax payers before they sell any assets, so he's mistakenly assumed that GCT is 40%, it isn't. He is right that in working out the taxable gain your income is irrelevent, but once you've arrived at the taxable gain, its added to your other income and taxed in the normal way.

All that might seem very complicated [probably cos it is!!] & scary but the bottom line is your CGT is likely to be quite small unless you're already a higher rate tax payer, which it sounds like you're a long way from being.

As you can see from the other posts CGT is very complex BUT there are plenty of reliefs that can mean you pay LITTLE or even NO TAX on your payout. Agree with Cheerfulcat, get an accountant to do the figures [nice link BTW] - you'll save their fees by getting them to do the return for you. It doesn't have to be reported until after the end of the tax year it took place in, so interest from a high rate saver should more than cover the liability!

BTW, did you declare "nice little payout" each September for tax? The accountant should help you sort that out as well if you didn't.

Alison_B

Ian W, I will send you a PM if you don't mind.

reddevilled

Ian_W wrote:

BTW, did you declare "nice little payout" each September for tax? The accountant should help you sort that out as well if you didn't.

Doubt this is an issue really, unless the nice little payout was £45k, as the dividend tax credit will cover any "tax" due unless she is higher rate.

If the payout was 45k for 90 odd shares please can you tell me where I can get some of these shares