Entrepreneur’s Relief (“ER”) has been with us more than six years now and can reduce capital gains tax (“CGT”) to only 10% on the disposal of certain business assets, provided certain conditions are met. However, despite these conditions seemingly being straight forward, it is also very easy to fall foul of the provisions and lose out on this valuable relief.
Here are some of the traps to avoid, helping make certain you do not lose out on your ER when selling shares or assets used by your company:
You need to own at least 5% of the ordinary share capital and voting rights in a trading company for at least one year before the sale as well as being an employee of officer of the company for that same period.
Do not therefore resign as an employee or officer before your share disposal as this will prevent the relief. The employment does not have to be paid, as held in the recent case of Mrs S Corbett v HMRC TC03435, although you do need to be able to demonstrate that the employment is genuine.
If there are no suitable duties to undertake, perhaps by a spouse who may hold shares to spread the tax cost of holding those shares, consider making the spouse a company officer (company secretary or director) instead, although again, the post should be held for at least a year before the sale. The office is easily proven given the requirements to lodge this at Companies House.
If some shares have been transferred previously to a spouse and either held by them for less than 12 months before a sale or their holding is less than 5%, consider transferring the shares back to the original spouse to be combined with his holding, assuming this already exceeds the 5% requirement.
The nominal share capital is considered in the 5% case and care is needed where different classes of share exist or where holders of options may acquire shares shortly before an onward sale of the company to a third party.
You need to also ensure your company is a trading company for the 12 months before the sale. This means that any non trading activities such as renting out property to third parties should not be substantial (taken to be less than 20% of the overall activities). If the company owns investment property or has significant cash reserves, you could consider dividending these out some time ahead of the share disposal to preserve your ER.
Where assets are owned by an individual and let to a trading company owned by the individual, any disposal of the property might qualify for ER provided it follows a qualifying share disposal by the individual. No ER is available when simply selling the asset, for example trading premises, without a qualifying share disposal and so this should not be overlooked when moving or disposing of surplus property.
Further, charging a rent at market rate after April 2008 will reduce the amount of gain that can benefit from the 10% tax rate and so reducing rental charges can help here, although careful planning is needed to make certain any loans taken out to buy the property can still be relieved.
Some assets might already be held in a limited company and if sold will be taxed at 20% after the gain has been reduced by indexation allowance. It may however be an idea to transfer appreciating assets in specie out of the company (SDLT free) and allow more of the gain to accrue outside and then, with planning, be taxed at only 10% instead. IHT should always be considered as part of this planning.
You can never depend on ER being available on the disposal of any assets and you should always seek advice well ahead of any planned disposal to ensure any appropriate planning is put in place to avoid potential traps as soon as possible.
Please do contact us if you are planning to dispose of any assets to make certain your reliefs are maximised as far as possible.