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Case Study

Mr Campbell and Mr Terry each own 50% of a profitable trading company, Lampard Ltd.  Over the years the company has accumulated cash reserves of £2m on annual profits of £300,000 before tax.

They are likely to consider selling the company in the next 5-6 years, and had hoped to pay only 10% tax when they did so.

At today’s values the trade and assets (including goodwill) are valued at £1m with the cash increasing the value of the shares to £3m.

In a snapshot, their position is probably not as good as they think it is to start with.

• They are unlikely to get the 10% CGT rate now, even if they found a buyer.  The Revenue will argue that the level of cash seems to indicate substantial non-trading activities which will jeopardise the taper relief.
• The £2m cash will not be covered by Business Property Relief (the 100% exemption from IHT for shares in trading companies) because it is a non-trade asset.  Its scale may even invalidate BPR on the value of the trade itself.

They have a few options to consider before 6 April next year.  Likely to be top of our list of recommendations are:

1. Extract most of the cash now to reduce the final sale proceeds by the same amount (saving CGT in the process).  This can be done tax-free and put the cash into IHT effective trusts (removing the value from their estates without any lifetime tax charges or 7 year clock to run).
2. Use our “RICS” strategy to hedge their bets and arbitrage the two CGT regimes.

Other options to consider include

• Do nothing and hope they are better off under whatever the rules are when they finally sell.
• Gift the shares into a trust, but note that the surplus cash may also prevent a claim to hold over any CGT due on the gift.
• Sell the shares into a trust, but note the tax will be due on 31 January 2009 come what may.
• Transfer the shares to their spouses, which should be effective to secure any indexation relief if the share were held before 1998, but won’t help with taper relief.
• Sell the company early, but they may not get best value and may not be practical in the timescales available.

In summary, we recommend that they take advantage of our offer to review their position, because there is too much at stake here to cut any corners.