finance 27
Thinking of selling? Entrepreneurs’ relief could save you up to £1.8m tax
Entrepreneurs’ relief can offer significant tax savings when selling shares or the whole or part of a business. So how do you qualify? What are the four pitfalls to avoid disqualification and what are clients asking us about tax planning and entrepreneurs’ relief? Rob Wilby, head of private client in Grant Thornton Southampton, addresses these questions
We all know that the Government sees the need to encourage entrepreneurs to continually generate wealth, and it has repeatedly turned to the tax system to do so. From retirement relief to business taper relief and now entrepreneurs’ relief, the sale of business assets or shares has attracted a measure of extra relief when compared with the sale of an investment.
When the newest version of these tax incentives, entrepreneurs’ relief, was introduced, the benefits were initially comparatively minor – a maximum saving of £80,000 capital gains tax (CGT) for an individual over the course of a lifetime.
With an increase in both the general rate of CGT and the amount of gains that can qualify for relief, you could now potentially save up to £1.8 million in CGT
In order to qualify, you must have held the assets being sold for at least 12 months
There are lots of things to consider here so always take professional advice
With an increase in both the general rate of CGT and the amount of gains that can qualify for relief, you could now potentially save up to £1.8 million in CGT. Where there is a sale in the offing, it is clearly worth ensuring that you qualify or seeing if there is anything that can be done to move into a position where you can claim the relief.
Do you qualify for entrepreneurs’ relief?
In order to qualify, you must have held the assets being sold for at least 12 months. The relief is then available broadly where there is a disposal of a business, a part of the business, or shares in a company.
Certain other disposals of assets used in the business or by the company can also qualify for relief. If a company has substantial non-trading activity (that is, generally more than 20%), then it may not qualify for the relief. If it is shares that are being sold, the individual must have been an officer or employee of the company and must have held 5% of the shares throughout the year before the sale.
Four pitfalls that may disqualify you
1. Significant non-trading activity As you build up profits in a company, the level of your investments may well increase. This is a problem if the company has significant (more than 20%) non-trading activity, judged by turnover, net assets, profit or time spent by directors.
2. Less than 5% in shares The shareholder must have held 5% of the shares throughout the 12 months prior to sale. If the company has issued share options that are exercised on a sale, this can create an issue if other holdings are diluted below the 5% threshold as a result of the issue of new shares.
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2012
3. Skewed voting rights/share capital It is not uncommon for a company to have additional classes of shares. These all need to be accounted for when considering whether the individual in question has held the requisite 5% of voting rights and 5% of share capital. Overriding voting particulars (such as taking votes by a show of hands at an AGM) can also create an issue on this front.
4. Transfers to spouse who isn’t an employee It used to be the case that assets could be transferred to a spouse before sale to enjoy the benefit of their lower tax rates and capital gains exemption. That can cause an issue for entrepreneurs’ relief, as unless they hold the shares for a year and have also been an employee or director of the company, they may well not qualify.
Frequently asked questions
The same questions tend to crop up with entrepreneurs’ relief. A brief response is shown below but it is best to seek full and professional advice.
• What do I do if I don’t quite hold 5% of the shares? Quick answer: There are tax planning options here, such as creating a new class of shares, but you will need co-operation from other shareholders. Remember, this needs to be done well in advance of a sale.
• The shares are held in trust, do I get the relief? Quick answer: You can transfer your relief to the trustees, provided that you hold 5% of the shares personally and you are the life tenant of the trust.
• I am selling my company for cash and shares, does this affect the relief I am due? Quick answer: A disposal for cash is taxable (and entrepreneurs’ relief might apply), while the gain on the sale for shares is generally not taxed until the new shares are sold. The problem is that entrepreneurs’ relief might not be due on the new shares, for example if you own less than 5% of that company. It is possible to elect to pay tax on the whole gain now; you’ll pay more CGT in the short term but could make a tax saving overall. There are lots of things to consider here so always take professional advice.
Details: Rob Wilby 023-8038-1261
robert.m.wilby@uk.gt.com
www.businessmag.co.uk
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