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Think the unthinkable

Think the unthinkable

One of the most important roles of an accountant is to think the unthinkable and challenge client’s actions.

This may be challenging a decision to transfer assets to a partner or spouse, or even children. While the relationship may be gloriously happy now what happens if circumstances change and the relationship deteriorates?  This can lead to some very difficult and messy situations with businesses crippled by infighting and poor or no decision making.

None of us really want to face our own mortality or even consider that we may have an illness or physical injury which may be life changing. Having experienced the latter personally I can assure you that unpreparedness will make a bad situation even worse. But getting a fit and healthy client to consider these possibilities and plan for them is often challenging and often overlooked by advisers who are over focused on the tax planning.

There is a saying in our industry that ‘you should never let the tax tail wag the commercial dog’ but equally perhaps ‘the tax tail should never wag the dog of life’. Like dogs, life has teeth that can bite when you are least expecting it.

This can be illustrated by the recent First Tier Tribunal case Kavanagh [2022] TC 08500.  Mr Kavanagh acquired shares through a share for share exchange merging the business of which he was a 50% shareholder with a newly formed group.  The result of the share for share exchange was that Mr Kavanagh held 4.99997% due to rounding.  Mr Kavanagh subsequently sold his shares and claimed entrepreneurs relief, now Business Asset Disposal relief.  One of the conditions of the relief is that the company is a personal company of the shareholder which requires, as one of the conditions, that 5% of the share capital is held by the shareholder.  The relief was denied by HMRC which was upheld by the First Tier Tribunal.

Assuming that Mr Kavanagh was higher rate taxpayer this will increase the rate of tax on the share disposal from 10% to 20%.

This is a prime example of where, as a adviser, as well as looking at the current planning it is important to consider the what-ifs, the maybes and the client’s future plans.