CAPITAL GAINS TAX
RETIREMENT RELIEF AND LIQUIDATIONS SECTION 26 CAPITAL GAINS TAX ACT 1975

Introduction

Where an individual aged 55 years or over disposes of his/her business, farm or shares in a family company retirement relief under Section 26 Capital Gains Tax Act 1975 may be due. If the consideration does not exceed £250,000 total relief from capital gains tax may be claimed. There is provision for marginal relief where the consideration does not greatly exceed £250,000.

Liquidations

Where an individual’s family company is liquidated and a distribution in respect of shares in the company is made, this represents a disposal or part disposal of the shares by the individual. Retirement relief may be due in respect of such a disposal, subject to the limit of £250,000.

Section 26(5) provides that relief will not be due where the distribution consists of chargeable business assets. Where the distribution consists partly of such assets, then a fraction of the distribution may qualify for relief, that fraction being the ratio of the value of the distribution excluding the chargeable business assets to the value of the entire distribution i.e.

However, as for any other disposal of shares, the amount qualifying for relief under Section 26(1) is further restricted under Section 26(3) to the part of the consideration which is equal to the proportion which the company’s chargeable business assets bears to the value of the company’s total chargeable assets i.e.

Revenue Practice

Where a company’s chargeable business assets are sold as a preliminary to liquidation, a disproportionate part of the company’s assets may be held in chargeable non-business assets at the date of disposal. In practice however, the proceeds of such sales may be included in the value of the company’s chargeable business assets at the date of disposal. For this purpose, “preliminary” may be taken as meaning not more than six months before the date of disposal of the shares or date of appointment of the liquidator, whichever is the earlier.

Example
Balance Sheet of Company X

The qualifying part of the consideration is £132,708 and as this does not exceed the threshold of £250,000, relief is due as follows:-

The balance of the gain (i.e. £75,000 - £26,541 = £48,459) is chargeable.Relief under Section 16 (annual exemption) is not due where relief is allowed under Section 26 (retirement relief).