Q: I own a small printing company and I am thinking about my retirement. My son works in the business and I would like to pass my shares on to him when I retire. I have been told that I will have to pay capital gains tax when I do this. Is this correct?

Alan Curry answers: Shares are ‘chargeable assets’ for capital gains tax purposes. Therefore, when an individual gifts shares to another individual, a gain will arise which is subject to capital gains tax if the market value of the shares is greater than the base cost of the shares. This will arise even if your son does not pay you for the shares.

For example, if the market value of the shares is £200,000 and their base cost was originally £50,000, a gain of £150,000 will arise which will be subject to capital gains tax (CGT) at a flat rate of 18%. It is likely that you will be able to claim entrepreneurs’ relief which will reduce the rate of CGT to 10%.

Another relief, known as gift relief, is available which will allow you to defer the CGT on the transfer of shares to your son. The taxation of the gain is effectively postponed until your son sells the shares. Using the example above, your son will receive the shares from you at a market value of £200,000. His base cost of the shares will be £200,000, less the gain of £150,000 that you have deferred under gift relief (i.e. £50,000). If your son sells the shares for, say, £450,000, his capital gain will be £400,000 (being £450,000 less his base cost of £50,000) and he will have to pay CGT on this unless it can be avoided by other tax planning measures.

Gift relief is only available on certain types of assets, such as business assets, shares in unlisted trading companies and agricultural land. There are also inheritance tax implications on gifts of assets. Anyone considering making such gifts should obtain professional advice.

Alternatively, you may wish to retain the shares until you die. If the shares qualify for inheritance tax relief on your death, you could gift the shares to your son under your Will. However, there is a risk that the legislation could change before such circumstances arise. It is often better to plan ahead by taking current legislation into account.