There is also the important condition that requires you to be an employee or officer of the company if you are selling shares. This should not represent a problem to those employees (rather than owner/managers) with shares in their employer company but the “material interest” condition is morelikely to. For unincorporated businesses, you need to have been carrying on the business alone or in partnership to stand a chance of qualifying. Qualifying for what, though? Let us take a look at the new entrepreneurs’ relief in a bit more detail.
Most people who are even remotely interested in this subject will be aware that the relief delivers an effective 10 per cent rate of tax for up to £1m of gains made by an individual on the disposal of business assets. As always, there is a bit more to it than that, though. What are the fundamental details of entrepreneurs’ relief?
I believe it is essential that financial advisers should be broadly aware of how the new rules will work, even if they are not going to be arranging or advising on a disposal or tax planning in connection with a disposal. Their clients will expect them to be aware of the rules and the financial adviser may be seen as the first place to come for this information. If you are not, perhapsyou should be.
I always liked the “I saw this and thought of you” approach to targeted proactivity and differentiation. In other words, being the one to inform the client about a development likely to be relevant to them and, even better, giving a view on what the event or development could mean.
If this type of thoughtful and relevant communication is delivered in a well timed and consistent fashion, the likelihood is that the client will think of you first when it comes to financial issues. Trust is likely to flow from this. You can also reap the commercial benefit of mass customisation by maximising the benefit of informed communication to a segment of clients to whom the communication is relevant and topical. This will give you the chance to secure the benefit of scale on intellect and understanding.
Let us have a look at the detail of the relief as it stands. At the time of writing, there is no draft legislation available.
Entrepreneurs’ relief will take effect from April 6, alongside the CGT reform programme announced in the pre-Budget report. We do have the draft legislation on this, which was published at the same time that entrepreneurs’ relief was announced. Entrepreneurs’ relief will be available in respect of gains made on the disposal of all or part of a business or on disposals of assets following the cessation of a business by certain individualswho were involved in running the business.
The first £1m of gains that qualify for relief will be charged to CGT at an effective rate of 10 per cent. This is arrived at by reducing the gain by four-ninths and applying the new 18 per cent rate to the reduced gain.The amount arrived at will be10 per cent of the unreduced gain. Simplicity itself.
Gains in excess of £1mwill be charged at thenormal 18 per cent rate.
An individual will be able to make claims for relief on more than one occasion, up to a lifetime cumulative total of £1m of gains qualifying for relief. This principle of a lifetime allowance is an important one and will impose some recording requirements. No doubt, these will be made clear in the context of the claims’ procedure which will undoubtedly be embodied in the legislation.
The conditions for the new relief will be based broadly on the CGT retirement relief (see TCGA 1992, ss163 and 164 and Sch 6) that was phased out between 1998 and 2003 but the new rules will be simpler.
There will be no minimum age limit for entrepreneurs’ relief. In general, relief will be available where the relevant conditions are met for a period of one year, instead of the retirement relief qualifying period of up to 10 years.
The relief will apply to gains arising on disposals of the whole or part of a trading business – including professions and vocations but not including a property letting business other than furnished holiday lettings – that is carried on by an individual, either alone or in partnership. Where a business is not disposed of as a going concern but simply ceases, relief will be available on gains on assets formerly used in the business and disposed of within three years of cessation.
The relief will also apply to gains on disposals of shares and securities in a trading company or the holding company of a trading group, provided that the individual making the disposal:
l Has been an officer or employee of the company or of a company in the same group of companies andl Owns at least 5 per cent of the ordinary share capital of the company and that holding enables the them to exercise at least 5 per cent of voting rights in that company.
These conditions are what will exclude most private equity holdings from qualifying for the relief.