Selling a Privately Owned Business – Capital Gains Tax (“CGT”) & Entrepreneurs’ Relief
For many business owners, Entrepreneurs’ Relief offers an exceptional opportunity to minimise tax when disposing of their company. Here are some basic points:
• Entrepreneurs’ Relief, which was first introduced in 2008, allows tax of just 10% to be paid on the capital gain when a business (or part of it) is sold off.
• The rate of CGT on most assets is now just 20% for higher rate and additional rate taxpayers, down from 28%, but this is still only half as generous to business owners as Entrepreneurs’ Relief.
• Recent changes in the level of relief available have taken the limit on which relief can be claimed from below £2 million right up to £10 million, where it has remained since 2011.
• Moreover, this is a lifetime limit, not just for any single transaction, so an individual can make as many separate claims as he or she likes, so long as the ceiling of £10m is not exceeded.
• Furthermore, spouses and civil partners may also, under certain circumstances, qualify separately for their own relief.
• In 2016 the relief was extended to long-term investors in unlisted companies, providing a 10% tax rate for gains of newly issued shares in unlisted companies that were bought on or after 17 March 2016, so long as they are held for at least three years from 6 April 2016.
• The relief applies to sales of the assets of a business, or sale of company shares in which the seller owns at least 5% of the shares (including voting rights).
There are some key rules, foremost amongst them being:
• Each shareholder must have held the assets being sold – which in practice will normally be the shares in the company or the actual business assets being sold – for at least a year. In the case of shares at least 5% of the total shares must have been held, and the seller must have been an employee (or director) for the whole of the final year prior to sale.
• The business or company involved must be trading at the time of application – although a new rule allows the relief to be claimed so long as the shares are sold within three years of the cessation of trading.
• Some business activities, such as property and letting, are disqualified because they are seen as ‘investment operations’ rather than ‘trades’. To receive the relief, a company must be trading, and not pursuing other activities to any ‘substantial’ extent. HMRC has confirmed that ‘substantial’ should be taken to mean ‘greater than 20% by reference to a reasonable measure in the circumstances of the case’.
• Sole traders or business partners must have owned the business for at least a year in order for the sale to qualify, and the seller of shares must have been an employee, director or holder of the office within the company.
While Entrepreneurs’ Relief offers a potential boost for business owners, its complexities require careful navigation, and detailed understanding of recent legislation. Individuals looking to rely on the relief would be well-advised to conduct an appropriate tax audit or seek specialist advice.
21 September 2017