If you are building a business you must have an end goal. For most entrepreneurs that end goal is the wish for a pot of gold at the end of the rainbow. Hopefully we will all get there and all the effort will be worthwhile. Unfortunately someone else hopes you’ll get there too, it’s not a naughty leprechaun but someone equally as annoying, the tax man!
Fortunately he isn’t as greedy as usual. Provided you qualify for Entrepreneurs’ Relief (ER) and are selling business assets then the capital gains tax liability you incur could be as low as 10%. With a lifetime limit of £10 million per person, it covers the vast majority of business disposals for the vast majority of taxpayers.
ER is not without its complications and pitfalls, however with careful planning it can be secured in a number of situations.
In brief, ER relates to the disposal of the whole or part of a business or certain business assets used in a business provided you have held the business asset for a specified period of time and that throughout the period of ownership you did so in the correct capacity.
The main items are:
- Shares in your own trading personal company which you hold as an employee or officer of the company.
- The goodwill in your business if you are trading as a sole trader or in a partnership.
There are numerous other assets which when sold could also qualify for ER. ER is however complicated and can be easily lost so please seek professional advice.
There were two changes that came into effect on 6 April 2019.
Firstly the length of time that the assets are held has been increased from 1 year to 2 years. That means that whatever category the business asset falls into it will only qualify for ER if it has been held for at least 2 years at the date of disposal.
Secondly there has been a change to the definition of personal company. Previously a personal company was one in which you have:
- A holding of at least 5% of the ordinary share capital measured by nominal value; and
- A beneficial entitlement to 5% voting rights by reason of those shares;
Finance Act 2019 has inserted a further condition:
- A beneficial entitlement to either:
(i) 5% assets on winding up and entitlement to 5% distributable profits, or
(ii) in the event of a disposal of the whole of the ordinary share capital of the company, beneficial entitlement to at least 5% of the proceeds.
The new third condition looks to tighten the rules so that eligible shareholders have entitlement to 5% of the “economic value” of the company. However, by introducing the proceeds test at 3(ii) in the a late amendment the new conditions should now be less of a problem for share structures with multiple shares classes to allow dividend planning, provided those shareholders are entitled to at least 5% of the proceeds on sale of the company.
If you have growth shares or anything outside the norm then we would strongly recommend you seek advice now to check that you will qualify for ER.
We would always recommend that you seek professional advice when considering any transactions involving business assets to ensure you maximise the reliefs available and minimise your tax liabilities. If you would like help with capital gains tax contact Jan Friend on 01634 731390 or at email@example.com
The content in this blog is correct as at 23rd May 2019. See terms and conditions.