If you’re thinking of selling your business, you obviously want to maximise your return from all your hard work and minimise the amount you have to give the taxman.
Entrepreneurs’ relief can potentially reduce the capital gains tax on the sale of a business from a rate of 28% to 10%. That can represent a significant sum. But the relief is only available as long as the qualifying conditions are met. Because the conditions generally need to be met for 12 months prior to the disposal or the cessation of the business, it is essential to plan ahead for the sale to maximise the aid you are able to receive.
The relief is available to individuals and to some trustees on qualifying gains made on the disposal of all or part of a business, the disposal of the assets of the business after it has stopped trading, or shares in a personal trading company. Individuals may qualify if they are in business as a sole trader or in partnership, or if they hold shares in their personal trading company.
Relief is available up to the lifetime limit (currently £10 million). Each spouse or civil partner has their own lifetime limit. The relief must be claimed.
The conditions which must be met for the relief to be forthcoming depend on the nature of the disposal. These conditions must be met throughout the qualifying period.
Where the disposal is of the whole or part of a business, the individual must either own the business directly or in partnership. If the disposal is of assets following the cessation of a business, once again, the individual must have owned the business directly or in partnership, and the assets in use at cessation. Further, the disposal of the assets must take place within three years of the date on which the business ceased.
In the case of a disposal of shares or securities, to qualify for relief the company must be:
- the individual’s personal company;
- either a trading company or the holding company of a trading group; and
- the individual must be either an officer or an employee of that company (or of one or more members of the trading group).
A company is the individual’s personal company if he or she holds at least 5% of the ordinary share capital and that holding has at least 5% of the voting rights.
Planning ahead – the importance of the qualifying period
The conditions for Entrepreneurs’ Relief must be met throughout the qualifying period. Disposal of the whole or part of a business has a qualifying period of one year ending with the date of the disposal. If the business ceases, the qualifying period is the period of one year ending with the date of cessation.
Where the claim for relief relates to the sale of shares or securities in a personal trading company, the qualifying period runs to the date of their disposal. However, if the company ceases to be a trading company or a member of a trading group within the period of three years before the date of disposal of the shares or securities, the qualifying period runs to the date on which the company ceased to be a trading company or a member of a trading group.
The cost of failing to meet the qualifying conditions throughout the qualifying period can be high. It is therefore essential to plan ahead for the disposal. To maximise relief, this may mean that shares need to be transferred from one spouse to another to ensure that each holds 5% of the ordinary share capital and 5% of the voting rights. Shares can be transferred between spouses and civil partners at a value which gives rise to neither a gain nor a loss. In some cases, it may be beneficial to delay the disposal to ensure that the conditions have been met throughout the one-year qualifying period.
Effect of the relief
Where the conditions for entrepreneurs’ relief are met, gains on the qualifying disposal are taxed at 10% to the extent that they exceed the capital gains tax annual exempt amount (£11,000 for 2014/15), as long as the lifetime limit remains available. For example, if the conditions for relief are met (and assuming the annual exempt amount is utilised elsewhere) capital gains tax of £50,000 would be payable on a gain of £500,000. Without the relief, the liability could be £140,000 (28% of £500,000). A failure to plan ahead could be very costly.
Nick Brennan FAC is Tax Partner at chartered accountants Citroen Wells. He has extensive experience of compliance and structuring, both in the UK and internationally, and in advising individuals, businesses and trusts. He is also secretary of the London Branch of the Chartered Institute of Taxation.