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to defer the CGT liability arising on the sale until the loan notes themselves are redeemed. But beware; it’s unlikely that the individual will satisfy the entrepreneurs’ relief conditions in relation to the loan notes, so there’s a danger of losing the right to entrepreneurs’ relief on the sale. T is situation can be avoided by disapplying the share reorganisation provisions and accepting a CGT charge at the time of the sale. T is will preserve the relief but will mean the tax liability is paid earlier.

Link with other CGT deferral reliefs Gains deferred in Enterprise Investment


now worth a maximum saving of £1.8 million per person, is extremely valuable. But, given the minimum 12-month qualifying period before a sale, it may take careful planning not to lose out.

T Shares and securities

To qualify for entrepreneurs’ relief you must hold at least 5% of the share capital and voting rights and be an offi cer or employee of the company in question, but there is no minimum working hours requirement. As long as the employment has commercial substance, it will qualify. Non-executive directors and company secretaries qualify as offi cers or employees of the company for the purposes of entrepreneurs’ relief. Where shareholders own at least 5% of the

share capital and voting rights but are not offi cers or employees of the company, it may be worth appointing them as such to enable them to qualify for the relief.

If a sale is imminent and a married couple holds

shares in a company where one spouse will qualify for the relief and the other will not, they should consider a transfer of shares between spouses before the disposal. Splitting shareholdings between family members may also provide an opportunity for a second £10 million lifetime allowance, providing the recipient also satisfi es the conditions for relief.

he lifetime limit on gains qualifying for entrepreneurs’ relief was doubled from £5 million to £10 million with eff ect from 6 April 2011. T is relief,


Advice on protecting your entitlement to entrepreneurs’ relief from accountancy fi rm Littlejohn LLP

Trading status T e company must be a trading company - any

‘non-trading’ activities must not be ‘substantial’. You may want to consider restructuring the business to separate the non-trading and trading activities, or minimising non-trading activities in the fi nal 12 months of ownership. If the company has ceased to trade, the

shareholders have three years from that date to eff ect a disposal and still qualify for entrepreneurs’ relief.

Share capital It’s a good idea to carry out a fresh review of

your entitlement to entrepreneurs’ relief whenever the company’s issued share capital increases or decreases. Be careful where share options are involved, as any future increase in share capital will dilute interests and could unknowingly compromise a shareholder’s entitlement to relief. Where a share option scheme exists, employees will often exercise their options immediately before a sale. But as they will not have held the shares for the minimum holding period of 12 months, they won’t qualify for entrepreneurs’ relief.

Deferred consideration

Often the sale of a company is structured in such a way that part of the consideration is deferred - either as a fi xed sum agreed at the outset, or as an amount dependent on the future performance of the business. In the case of deferred consideration, loan notes are often issued

Scheme (EIS) shares will now only qualify for relief when the gain ultimately crystallises if the conditions are satisfi ed in relation to the EIS shares themselves. Entrepreneurs’ relief is calculated on net gains at a rate of 10%. T is means that any gains previously deferred are now unlikely to benefi t from the relief.

Entrepreneurs’ relief and trusts Entrepreneurs’ relief is not available where

shares, otherwise qualifying for the relief, are held on discretionary trust. T e loss of the relief must therefore be weighed up against the benefi ts off ered by these structures. In the case of life interests, entrepreneurs’ relief is available only if it is the benefi ciary’s personal company and he or she is also an offi cer or employee. T is may mean advancing a suffi cient number of shares to the life tenant to ensure these conditions are met. For off shore trusts, if gains that would

otherwise qualify for relief under the normal conditions are attributed to the settlor, entrepreneurs’ relief should still be available. Deemed gains assessable on the benefi ciary will, however, not be entitled to relief.

In conclusion

All this demonstrates the complexity of qualifying for entrepreneurs’ relief - and the importance of planning well in advance of a sale so as not to miss out.

Zoe Hidden is a tax consultant with London accountancy fi rm Littlejohn. For further information and advice, please contact Zoe Hidden on 020 7516 2298 or by email zhidden@


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