View more on these topics

Entrepreneurs’ tax relief: what financial advisers need to know

entrepreneurs' tax relief

Entrepreneurs’ tax relief is important for all business owners, so advisers need to understand the key issues both for their clients and, in many cases, themselves as well. The relief is really valuable: the capital gains tax charge on qualifying assets is only 10 per cent. That is a rate of tax most people can easily tolerate without feeling the need to undertake elaborate avoidance planning or go abroad for long periods.

Mind you, with the rate of CGT on most assets (other than residential property and carried interest) now down to just 20 per cent for higher and additional rate taxpayers, missing out on entrepreneurs’ relief has not been quite such a disaster since 6 April this year.

There is an overall lifetime limit of £10m on the amount of gains on which you can claim the relief, but as long as you do not exceed this you can claim the relief as often as you like. What is more, spouses and civil partners can qualify separately for their own entrepreneurs’ relief if they each meet the various conditions to claim it. Trusts, however, do not have their own separate £10m limit. Trust assets can qualify but only by reference to the lifetime limits of the beneficiaries.

What assets can qualify?
Several types of assets can qualify for entrepreneurs’ relief. These are as follows:

  • All or part of a business owned by a sole trader or business partner, including the business’ assets after it closed.
  • Shares (or securities) in a company where the person making the disposal has at least 5 per cent of the shares and voting rights (a “personal company”).
  • Shares acquired through an Enterprise Management Incentive scheme after 5 April 2013.
  • Assets the person making the disposal lent to their business or personal company for the trade. “Disposal” in this context often means sale but it could mean gift or even the liquidation of a personal company.

New rules
An important change made this April to entrepreneurs’ relief hit directors that wind up a solvent company. They can no longer claim entrepreneurs’ relief if they continue to work in the same trade as the company in the following two years after the liquidation. A record number of solvent companies were wound up in March in anticipation of this change.

The new rule will affect situations where a shareholding director sells the goodwill and other business assets out of their company and then puts the company into liquidation and takes the proceeds as a capital gain taxed at just 10 per cent. In such circumstances, the buyer of the underlying business might well expect the outgoing owner to continue working as a consultant for a changeover period. This could now present a problem. Clients and advisers themselves should be aware of this possibility when negotiating a deal and get advice on the matter.

Entrepreneurs’ tax relief dos and don’ts
The business or company being disposed of must be trading to qualify for the relief. Some business activities do not get entrepreneurs’ relief because they are regarded as investment operations rather than trades: for example, most forms of property letting. And there can be complications where a company owns a share in a joint venture with another company. Indeed, there are some changes here in the Finance Bill.

There is some flexibility about the trading condition. Even if the company stops being a trading company, it is still possible to qualify for relief if the shares are sold within three years.

Sole traders or business partners must have owned the business for at least one year before the date on which they sell it. And if an owner is closing their business rather than selling it, they must have also owned it for at least a year before the closure. The business assets must then be disposed of within three years to qualify for relief.

For a sale of shares or securities, the seller must have been an employee, a director or some other office holder of the company being sold or one in the same group. Furthermore, for at least one year before the sale of the shares the seller must have had at least 5 per cent of shares and voting rights in the company.

The exception is shares that were acquired through an EMI scheme. The seller must have been given the option to buy the EMI shares at least one year before disposing of them.

Assets a business owner has lent to their business may also qualify for entrepreneurs’ relief. The most common example is a property that the individual business owner holds personally but has lent to the business. The conditions for such assets to qualify are that the owner must have sold at least 5 per cent of their part of a business partnership or shares in their personal company.

What is more, they must have owned the assets but allowed the business partnership or personal company to use them for at least one year up to the date of the sale or the date the business closed.

It is an inescapable fact a lot of people regard their business as their pension and fail to diversify into other assets. The risks of this strategy are considerable but the tax benefits are crucial.

Danby Bloch is chairman at Helm Godfrey

Recommended

Danby Bloch
1

Danby Bloch: Lessons from 30 years in tax planning

Financial advisers often need to plan for 30-year periods. Indeed, lives divide into roughly 30-year intervals: in the first 30 years, many people find they are either financially dependent or saving very little, then there is usually about 30 years’ worth of saving from their 30s to 60s, followed by about 30 years of retirement […]

Danby Bloch
1

Danby Bloch: Beware the hidden CGT liability on homes

People’s homes are mostly free of capital gains tax but there have been some changes in the last couple of years that could catch the unwary. One has been the reduction in the period for which a homeowner qualifies for CGT relief at the end of their period of ownership, even if they have left […]

George-Osborne-walking-up-steps-700.jpg
8

Osborne to slash corporation tax to less than 15%

Chancellor George Osborne is to cut corporation tax from 20 per cent to less than 15 per cent in an attempt to win back investors’ business confidence following the Brexit vote. Osborne says Britain must show the world it is “still open for business” and outlined a new five-point plan to build a “super competitive […]

Europe-European-Flags-EU-700.jpg

European materials and the asymmetric opportunity

Rob Burnett, manager of the Neptune European Opportunities Fund, discuss the political and economic factors driving European equities today. With potentially tighter monetary policy on the horizon and record valuations for defensive stocks, Rob believes that there is an asymmetric opportunity to the upside for value strategies. Click here to watch the video Rob discusses: […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com