taxation 31
Entrepreneurs’ Relief is much more interesting
Entrepreneurs’ Relief (ER) is now worth up to £1.8 million following the doubling of the lifetime allowance to £10 million. It is vital therefore that company owners know whether or not a disposal of their shares qualifies for ER and it is an all or nothing qualification, writes Tim Smith of Baker Tilly
At its simplest, ER will be available provided that the individual making the disposal is an officer or employee of the company and owns 5% or more of both the share capital and voting rights in that company. These conditions have to be met for at least 12 months prior to the disposal and once they have been, all of the company’s shares and securities held by that individual qualify for ER – including any acquired only months or weeks before the sale.
However, simple mistakes could prove expensive. Individuals who own less than 5% of the shares, or are not an officer or employee of the company, need to consider their position. In addition, shareholders must not just assume that their trading company is a ‘trading company’ as defined in the legislation. There is no restriction of ER by reference to the value of any non-trading assets held: it is an all-or-nothing approach.
Selling shares for cash is quite straightforward.
If, however, all or part of the consideration is received in the form of loan notes, it is no longer possible to retain the benefit of ER and defer paying the tax until the loan notes are redeemed.
With deferred consideration, it must be considered whether it is better to submit an election for the gain not to be deferred and so bring forward the payment of 10% tax; or to make no election and defer the gain, but pay 28% tax on the deferred gain.
It is not uncommon for acquirers to defer payment of some of the purchase price until the results of the current (or a subsequent) period are known. Earn-outs should not be taxed any differently to cash paid up-front, but ER is quite restrictive and is unlikely to apply to an earn-out deal – thereby leading to the prospect of paying 28% tax on the earn-out element.
When ER was worth just £80,000, vendors might have preferred to accept an anomalous tax result than to become involved in complex ways of resolving it. Now that it is worth up to £1.8 million, it pays to seek professional advice early so as to understand the ER rules and to plan accordingly.
Details: Tim Smith 01256-486800
Tim.smith@
bakertilly.co.uk www.bakertilly.co.uk
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www.target-accountants.com THE BUSINESS MAGAZINE – THAMES VALLEY – NOVEMBER 2011
www.businessmag.co.uk
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