Entrepreneurs' Relief: Do You Qualify?
It can be hugely valuable ...
Entrepreneurs' Relief continues to be a hugely valuable Capital Gains Tax (CGT) relief available on the disposal of qualifying business assets and shares ...
You've worked hard to build your business so Entrepreneur's Relief could be hugely valuable!
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The legislation behind it can be complex and good planning is needed if the many pitfalls are to be avoided. We advise a number of shareholders and business owners that want to ensure, when the time is right to sell their business, that they qualify for Entrepreneurs' Relief.
"So what is Entrepreneurs' Relief?"
Where the conditions are met, Entrepreneurs' Relief reduces the amount of CGT payable on a disposal of qualifying business assets to just 10%, up to a lifetime maximum of £10m of capital gains.
Entrepreneurs' Relief can apply to the gift or sale of:
Business assets by a sole trader or partnership (including LLP).
Shares in a trading company or holding company of a trading group where the taxpayer has been for at least 1 year a director, officeholder or employee of the company or subsidiary, and holds for at least that year, over 5% of the ordinary voting share capital of the company.
Personal assets owned by partners or shareholders who are withdrawing from the business, and the disposal is material, and the asset has been owned and used within the business for the period of 1 year prior to the material disposal.
Disposals often fail to qualify for Entrepreneurs' Relief simply because professional advice was not sought in advance of the transaction.
Some of the problems can be rectified if they come to light before it is too late. At Essendon Tax Consultancy, our review service will flag up problem areas and include suggestions for how you can be put into a better position.
Below are just some of the problem areas to avoid:
Is the company trading?
A trading company is defined as a "company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities".
It has always been understood that HMRC will regard any activity as not being substantial if it comprises less than 20% of the company's activities.
Excess cash has, for a long time, presented advisors with a problem. However to fall within the above definition the holding of cash must be an activity as well as substantial. Therefore the mere holding of cash within a deposit account should not lead to the denial of Entrepreneurs' Relief.
We have used HMRC's non-statutory clearance service where there has been uncertainty over the trading status of a company.
Shares owned by family members
A key requirement for the 1-year ownership period is that the shareholder has at least 5% of the ordinary shares and voting rights and is a director, officeholder or employee.
There may be a temptation in the family company for the major shareholder to gift shares to a spouse or other family member, perhaps with a view to minimising income tax on dividend income. It is important in that scenario that the transferee spouse or family member is a director, officeholder or employee.
Resigning before sale of shares
As part of a share sale, the directors and officeholders will look to resign their position at some point around the time of disposal. Care must be taken to ensure that this does not happen prior to disposal otherwise one of the conditions will be failed and Entrepreneurs' Relief will not apply.
Furnished holiday lets
Where the rules on furnished holiday letting are satisfied, Entrepreneurs' Relief can apply to the sale of the business of furnished holiday letting. However, care should be taken where a single property is to be sold, where this forms part of an overall business of furnished holiday letting.
Often a business owner will look to hold the trading premises outside of the company, potentially to mitigate the risk of having that property exposed to legal claims. Where that is the case, and a rent is charged, the amount of Entrepreneurs' Relief available will either be restricted or removed altogether.
Trusts do not qualify in their own right for Entrepreneurs' Relief. However, the Trustees may be able to share in the beneficiaries' lifetime limit if the beneficiary elects to allow this. For this to happen, the beneficiary must be a qualifying beneficiary such as one that has an interest in possession in the trust.
Ensuring that disposals of what would be qualifying business assets or shares that qualify for Capital Gains Tax relief can result in substantial tax savings. Advanced planning may be required and professional advice should always be sought before the disposal is made.
"Would you like to know more?"
If you'd like to talk to me about Entrepreneurs' Relief and Capital Gains Tax, do give me a call on 0333 335 0427 or click here to send me an email enquiry and we can have an initial conversation to see how I can help you.
Until next time ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.