You’ve sold your company shares, banked the proceeds and now you’re considering what to do with the money.
First things first, let’s talk tax! The 10% tax rate which entrepreneurs’ relief attracts unsurprisingly has a number of conditions attached.
The basic points
Throughout the year ending with the share disposal:
The individual –
- Owns at least 5% of the ordinary share capital which attracts at least 5% of the voting rights of the company.
- Is an employee or officer of the company or one or more of the companies which are members of the trading group.
If these conditions are met in the year up to the company ceasing to trade, the individual has three years to dispose of their shares to still claim relief.
The individual conditions for shares acquired under an EMI option scheme has a slightly different set of rules.
What can go wrong?
- Investment activities of the company or group result in the company not meeting the trading status tests.
- The company is a corporate partner and the shareholder does not also hold the necessary in/direct partnership interest which could impact the company’s trading status.
- Resignations of employment or office holdings take place prior to the share disposal.
- Option holders enabled by a sale to acquire share capital, dilutes the ordinary shareholder interest below the 5% threshold prior to the disposal date.
- Previous gains result in the £10m lifetime allowance being exceeded.
- Certain trust structures are used where entrepreneurs’ relief is not available.
- The relief is not claimed within the statutory time limits i.e. the first 31 January anniversary following the tax year of disposal.
- Preference shares with terms which result in them falling into the ordinary share capital classification can reduce ordinary shareholdings below the 5% threshold.
On this final point, the McQuillan case began in the Upper Tribunal on 26th July to consider whether shares without dividend rights are excluded from the ordinary share capital definition. The result of this case could
have a significant impact on ordinary shareholders expecting to claim entrepreneurs’ relief.
The moral of this story is to review your position regularly and take specialist advice when it comes to the share capital of your company.