Q: I recently retired after 17 years as a director. The company was not in a position to buy back the shares and suggested a buy back over a period of four years. Can I claim any relief or will I have to pay tax on the proceeds?
Aug 17 2005
Answered by: Jackie Jarvis Ask a question
Retirement relief reduces a capital gains tax bill if you dispose of a business when you are fifty plus – or retire through ill-health. The first £250,000 of the gain is tax-free. However, it is being phased out over four years starting 6 April 1999, when the new taper relief for capital gains will allow up to 75 per cent of the gain on selling business assets to be free of tax. In the transitional four years the amount of gain which is tax-free under retirement relief will reduce. This change has thrown many people coming up to retirement into disarray as it will in some cases, especially where the gain is around £250,000, mean they will be worse off.
Mark Joscelyne of solicitors Olswang tells me that to qualify for retirement relief you must have been a full-time working director or employee up to the date of disposal. However you can still qualify if you carry on working for the company for at least 10 hours a week in a technical or managerial capacity, but as a director or employee rather than self-employed. In your case it would appear that you can only qualify for retirement relief if you can show that you and the company entered into an agreement, and therefore triggered a date of disposal for the buy-back of shares, in December 1995 when you ceased to be full-time.
He also warns that, unless certain conditions are satisfied, a buy-back of shares by a company will be considered a distribution for tax purposes.
This would mean that the sale proceeds, less what you originally paid, will be treated as income, just like a dividend, and taxed at 20% (assuming you are a higher-rate taxpayer). Retirement relief and other CGT reliefs can’t be used. You need to take particular care that the staggered nature of the buy-back which you are proposing doesn’t cause this to be treated as income.
All in all, a pretty complex case and I think you should take professional advice to make sure that this is structured for your benefit as well as the company’s.
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