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Business Tax  •  Entrepreneur's Relief  •  Personal tax  •  Tax Planning  •  Tax Relief

Entrepreneurs’ relief planning and pitfalls

By Lesley Stalker on 24 June, 2015

 

If you own shares in a trading company and you qualify for entrepreneurs’ relief (ER) on their disposal, you will suffer capital gains tax at the rate of only 10% (compared to 18% or 28%) on the capital gains arising.

The following disposals can qualify for the relief:

  • The disposal of all or part of a business;
  • The disposal of business assets used by a company or partnership where the disposal is associated with the disposal of shares in the company or assets of the partnership;
  • The disposal of shares or securities in a qualifying company.
  • ER is a lifetime relief with a current cap of £10 million per person and can be utilised multiple times until the cap is reached. It can therefore save any one individual up to £1,800,000 in tax (£10m x (28%-10%)).

HMRC has, in recent months, introduced the following restrictions to the eligibility criteria for ER;

  • an existing business incorporating into a limited company owned by connected individuals is no longer eligible for ER on the transfer of goodwill; and
    ER is no longer available for disposals of joint venture shareholdings.
  • We have blogged about both these changes in recent postings.

This article focuses on the disposal of qualifying shares; surprisingly, for such a valuable relief, the qualifying criteria for company shareholders are few and they appear quite simple. As a result it can be surprisingly easy to trip up.

Points to be aware of and to watch out for:

  • The company in which the shares are held must be a trading company or the holding company of a trading group. This means a company, or its subsidiaries, whose activities do not include ‘to a substantial extent’ activities which are not trading activities. HMRC will generally consider ‘substantial’ to mean more than 20%. So a company which has significant cash reserves should either clearly be holding them for trading purposes, and should document that fact. In addition, it should be extremely careful how those funds are invested to ensure there is not substantial investment activity being undertaken;
  • Note that the commercial letting of furnished holiday accommodation is treated as a trade for the purpose of ER;
  • The shares must have been owned for at least 12 months. This minimum ownership period does not however apply to shares which were acquired under an enterprise management incentive (EMI) share option scheme; in this case the 12 month qualifying period commences on the date on which the share options are granted;
  • Throughout the 12 month ownership period, the company must have been the shareholder’s ‘personal company’. This means the shareholder must hold at least 5% of the ordinary share capital and must be able to exercise at least 5% of the voting rights. This minimum percentage shareholding does not apply to shares acquired under an EMI share option scheme;
  • For a period of 12 months up to the date of disposal, the shareholder must be an officer or employee of the company or another group company. It is important that such positions are not resigned even one day before the shares are disposed of;
  • If the shares are disposed of after the company ceases to trade, the above conditions must be met for at least 12 months up to the date when the company ceased to trade and the shares must be disposed of within 3 years. So if your company is no longer trading, you may still qualify for relief – don’t just assume the relief is lost;
  • Where there has been a share for share exchange, the 12 month ownership period can include the holding period of the original shares;
  • A company can enter into a members’ voluntary liquidation and the funds extracted as share capital. If the qualifying criteria are met, ER can be claimed.

If you are considering a disposal in the next 12 months and will be claiming entrepreneurs’ relief, it will be useful to seek advice to ensure you meet all eligible criteria. For more information, contact Lesley Stalker by emailing las@rjp.co.uk.

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