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Mr A had been in partnership with his father in a trading partnership for some years. A difference of opinion on the running thereof resulted in Mr A buying out his father in April 1995, and purchasing the freehold of the property used by the business, with a sum of £10,000 for goodwill also being paid.
Mr A, now 57 years old, is retiring and has closed the business (with nothing received for the goodwill), and is selling the property for a gain of about £200,000.
Mr A had been in partnership with his father in a trading partnership for some years. A difference of opinion on the running thereof resulted in Mr A buying out his father in April 1995, and purchasing the freehold of the property used by the business, with a sum of £10,000 for goodwill also being paid.
Mr A, now 57 years old, is retiring and has closed the business (with nothing received for the goodwill), and is selling the property for a gain of about £200,000.
I am concerned as to the calculation of retirement relief. Mr A qualifies as having been in the business for over ten years, but only half of the assets which he is now selling have been owned for that period, as the transaction with his father was just seven years ago. How is the retirement relief calculated? What restriction, if any, is to be set against the proportion of the business only owned for seven years? Is the whole of the £50,000 deduction available against the ten year plus period of ownership proportion?
Is there any relief for the loss on goodwill, or is this restricted by section 18, Taxation of Chargeable Gains Act 1992? If there is any relief, is it set against the proportion of the gain attributable to the shorter period of ownership?
(Query T16,010) - Retiree.
Unusually, the main issue here is simple. It is the person who qualifies for retirement relief, not the assets. The gain on any qualifying disposal is given according to the qualifying period of the person making the disposal, and the nature of the gains themselves is not significant.
There has been a well-known and long-standing planning point in relation to husbands and wives in this area - if one spouse qualifies for retirement relief and the other does not, it has been possible to transfer assets at 'no loss/no gain' to the qualifying spouse even at the last minute to increase the gain which is relieved. The fact that the donee spouse has only owned these assets for a short period is not relevant, as long as the donee qualified in his or her own right before that. For example: if shares were held 50:50, but one spouse did not work full-time for the company, a transfer of shares from the non-worker to the worker would increase the gain qualifying for relief. If one spouse worked full-time for the company and the other owned 100 per cent of the shares, nothing could be done at the last minute (it would be necessary to transfer at least 5 per cent so that the worker would start to build up a qualifying period).
So, as long as the sale of the building is within the 'permitted period' (within one year of the cessation of business, or longer if the Revenue allows), there should be no problem with retirement relief on the whole of the gain.
There should be no restriction on the loss arising on goodwill by reason of section 18, Taxation of Chargeable Gains Act 1992. If an amount was actually paid for goodwill, the Revenue should accept that it is a qualifying cost. The section restricts losses on disposals to connected persons, not on assets that have been acquired from them.
Paragraph 6 of Schedule 6 to the Taxation of Chargeable Gains Act 1992 requires the aggregation of gains on disposals of chargeable business assets for the calculation of retirement relief. Losses are not explicitly mentioned. If the business had been sold as a going concern, it would be easy to see that all the gains and losses should be aggregated to produce a single net gain on the disposal. In this case, it is more arguable - the goodwill seems to have 'disappeared' when the business ceased, and the property will be sold at a later date in a different transaction altogether. However, it seems to be outside the spirit of the legislation to ignore the loss in calculating the available retirement relief - if you are going to claim a loss on the goodwill, it falls within paragraph 6 of Schedule 6.
This relief would be set against the gain, and then the loss would be set against what remains, followed by taper relief (presumably at 75 per cent). If there are other gains which qualify for a lower rate of taper, the loss should probably be set against those other gains for the purposes of calculating taper relief, but this does not affect the offset of the loss against the gain on the property when calculating retirement relief. The two calculations can be done independently of each other. - Leyborne.
This question shows how quickly perceptions change. Under taper relief it is the length of ownership of any eligible asset that is relevant, not the period in business. This raised the concern, before Finance Bill 2002, of a premature rollover relief claim and a subsequent asset sale before full business taper had been obtained on the replacement asset.
Conversely, under retirement relief only the period in business is relevant, not ownership of particular assets. Thus once Mr A has been in business for ten years he qualifies for full retirement relief. This would be the case even if he was a serial purchaser and seller of businesses continually rolling gains over. Many husband and wife partnerships, set up for income tax advantages, had to sell the business before full retirement relief was available to both partners. This might be because one spouse had either not been in business for sufficient time or was below age 50. In these circumstances the transfer of the whole business to the qualifying spouse ensured full retirement relief for the qualifying partner. Mr A has been in business for more than ten years, and so qualifies. No apportionment is required.
The restriction under section 18, Taxation of Chargeable Gains Act 1992 only applies where the loss arises on transactions between connected parties; in this case father and son. However, it is presumed that Mr A is selling the property to an unconnected party and accordingly the loss on goodwill can be set against the property gain. Finally, 'Retiree' will need to ensure his client sells the property within the permitted period of twelve months (paragraph 1(2) of Schedule 6 to the Taxation of Chargeable Gains Act 1992) to ensure retirement relief is available. - Rookery.
Editorial note. Paragraph 12(1)(b) of Schedule 6 to the Taxation of Chargeable Gains Act 1992 appears to confirm that losses should be taken into account in calculating the entitlement to retirement relief: '12(1) Subject to paragraphs 9 to 11 above, in arriving at the aggregate gains under any of paragraphs 6, 7(1) and 8(1) above … (b) any allowable loss which accrues on the qualifying disposal concerned shall be deducted …'
