Tx notes fa22 Final

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Illustration 3 
A owns 60% of the shares in A Ltd an unquoted trading company. A Ltd has 100,000 £1 ordinary 
shares in issue all of which were subscribed for at par by the existing shareholders in 2004, from 
which date A has been the managing director of the company.
Share valuations have now been agreed as follows:
20%
£10 per share
40%
£15 per share
60%
£25 per share
80%
£40 per share
Advise A on the tax implications of gifting 20,000 of his shares to his daughter V.
The gift of the shares would have both IHT and CGT implications for both A and V.
For IHT purposes the gift would be a potentially exempt transfer (PET) and have no immediate tax 
implications. If A died within 7 years of the transfer the PET would become chargeable at either nil 
rate and / or 40% rate depending upon what other transfers had been made by A prior to this gift 
and when they were made. 
If A survived for at least 3 years then any IHT computed would be reduced by taper relief. Any such 
IHT payable would be payable by the donee, V and should be paid within 6 months of the end of the 
month in which the death occurred.
The value of the PET that would become chargeable on death is computed using the transfer of 
value principle. This compares the value of the donor’s estate before the transfer with the value after 
the transfer and would be computed as follows:
If A survives for more than 7 years the transfer will be exempt and no IHT will be payable when A 
dies.
A chargeable gain arises where there is a chargeable disposal of a chargeable asset by a chargeable 
person. The gifting of an asset represents a chargeable disposal and as the shares are a chargeable 
asset, a chargeable gain must be computed for the tax year of the gift based on the open market 
value of the asset being gifted - in this case 20,000 shares. 
The gain is computed as follows:
£
Before: 60,000 shares @ £25 per share 
=
1,500,000
After: 40,000 shares @ £15 per share
=
600,000
Transfer of value
900,000
£
Disposal consideration (20,000 @ £10 per share – note 1)
= 
200,000
Cost (20,000 @ £1 per share – note 2)
=
20,000
Chargeable gain
180,000

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