This tax relief has been extended and means that you may be able to pay less Capital Gains Tax when you sell or ‘dispose of’ all or part of your business. Entrepreneurs’ Relief means that you’ll pay tax at 10% on all gains on qualifying assets providing that certain conditions are met. Julie Robertson takes a closer look.
Entrepreneurs’ Relief may be claimed by individuals or trustees who sell shares or securities in a company or who choose to dispose of the whole or part of a business. The relief is available on up to £10 million of lifetime gains from 6th April 2008. However gains that were realised before this date do not restrict the availability of the lifetime limit. The relief can reduce the rate of tax from 28% to 10%, at its maximum amount, this can mean tax savings of up to £1.8 million for each individual.
But the relief is not mandatory and must be claimed on or before the first anniversary of 31st January following the tax year in which the qualifying disposal is made. For example, where a gain is made in 2013/14, the claim must be made by the 31st January 2016.
Conditions for qualification
The conditions to qualify for claiming Entrepreneurs Relief vary depending on whether you are selling shares in a company or are disposing of an interest in a business. As well as this there are different criteria where trustees are trying to claim the relief.
To claim the relief on the sale of shares, you must meet the following conditions:
• The shares must be held in a trading company (or the holding company of a trading group)
• As a vendor you must be an officer or employee of the company (or company within the same group)
• As a vendor you must own at least 5% of the company’s ordinary share capital and be able to exercise 5% of the voting rights within the company.
• All of these conditions must be met throughout the 12 month period leading up the date of disposal and where the company continues to trade up to that point.
• Where the company ceases to trade however, the conditions must be met throughout the 12 month period immediately prior to the date of cessation, provided the shares are sold within 3 years of the cessation date.
Where the qualifying conditions are met, Entrepreneurs’ Relief may be extended to include gains made on associated disposals of assets owned personally, but which are used in the company’s trade.
For example, if you are an individual shareholder and you personally own the property from which the business trades and the property is sold at the same time as the shares are sold. Care should be taken however if a commercial rent is being charged to the company for the use of the property as this could result in the relief being restricted or even denied.
Selling your business or business interest
If you are in business as a sole trader or you are in a partnership, the disposal of that business interest might qualify providing that the following conditions are met:
• Your business must be a trade, profession or a vocation. The commercial letting of furnished holiday accommodation in the UK or within the European Economic area would qualify for this.
• You must have owned the business or held an interest in that business throughout the 12 month period leading up to the date of sale.
In the event that the business ceases to trade but is not sold, the relief may be claimed against capital gains arising on assets that are used in the business (providing they are sold within 3 years of the business ceasing to trade).
For trustees to qualify for the relief on either the sale of shares or on business interests, the following conditions must be met:
• If you are a beneficiary, you must hold an interest in at least the part of the trust property being sold.
• In the case of shares, as a beneficiary you must be an officer or employee of the trading company and own at least 5% of the ordinary share capital and voting rights. And this must be met throughout the 12 month period leading up to the date of sale.
Areas where Entrepreneurs’ Relief can be denied
• Different classes of shares or deferred shares with no capital rights can impact on the availability of the relief, it is therefore important to review your shareholding structure before disposing of shares, this may mean cancelling or converting shares to satisfy the conditions for Entrepreneurs’ Relief.
• A share reorganisation where a new holding company acquires your company shares in the new holding company and the tax payer might not meet the 5% threshold.
• No or inadequate paperwork meaning that an HMRC challenge cannot be disposed of.
• Where the company enters into a joint venture and the tax payer might not meet the 5% threshold.
• A share purchase agreement that contains earn out provisions.
• Sale of part of a business.
What to do next
Entrepreneurs Relief has been extended and because of this we are finding that understanding entitlement to it can often be misunderstood. There are definitely pitfalls to avoid and we would strongly recommend early consideration of the key issues so that you can properly plan for and maximise the opportunities in plenty of time.
This is undoubtedly a valuable relief and if you think that you might qualify, it is essential that you review your possible entitlement to it at the earliest opportunity so that you can put yourself in the strongest position.
If you would like to know more about Entrepreneurs’ Relief, please contact one of the team at JRW who can advise you on the best course of action to take in your individual circumstances.