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Tony Wickenden: Trading places

Last week I published a few Faqs, asked of Peter Rayney of PR Tax Consulting, in relation to the possible impact of cash on deposit and actively invested funds on entrepreneurs’ relief. Well, I would like to start this week with a little case study to bring out the challenges – there is nothing like being prepared. This case study was also put to our friend (and mentor on all things SME) Peter Rayney.

Q1: If a company has, say, £500k in cash (from retained trading profits) and other balance sheet assets of £500k (so total £1m) – shifts £500k into a term deposit – 100 per cent of director’s time is spent on trading activities (once the investment is set up it takes up no time) – 100 per cent of income comes from trading (the deposit only produces an interest return at the end of the term)
1: Shares are sold while the investment is still in place or, 2: shares are sold more than 12 months after disinvestment so it is just ordinary cash on the balance sheet for the whole of the 12 months pre-sale. In each case, would entrepreneurs’ relief be at risk?

A1: Although HM Revenue & Customs often seems to be fixated on the assets test, I think a strong argument can be made for the trading test being satisfied in either case (based on facts). I would seek a prior non-statutory clearance to obtain certainty on the point.

Q2: And, in each case, would the answer be different if the value of the company’s goodwill (not represented on the balance sheet) was such that it made the investment/cash less than 20 per cent of the overall balance sheet plus goodwill total?

A2: This should place the entrepreneurs’ relief beyond any doubt in both cases.

Q3: Would it be true to say that the proportion of assets test is the predominant one in relation to the 20 per cent substantial investment test?

A3: HMRC seems to go for this one, but that is arguably not the correct approach. For example, dicta in a recent HMRC inheritance tax business property relief case tell us that the activities have to be looked at “in the round” so the balance sheet and balance sheet value are not the only factors to consider.

Entrepreneurs’ relief was introduced from April 6, 2008. This relief is available to individuals and trustees who, on or after April 6, 2008, make a qualifying business disposal of the whole or part of a trading business or shares in a trading company in which they have a qualifying interest.

When it was introduced, the first £1m of qualifying gains, on a cumulative lifetime basis, was reduced by 4/9ths before tax was charged at 18 per cent. This resulted in an effective rate of tax of 10 per cent on the whole gain up to £1m. From April 6, 2010, the limit was raised to £2m. From June 23, 2010, the method of giving relief was changed to a flat-rate tax charge of 10 per cent on qualifying cumulative lifetime gains of £5m, with the limit increasing to £10m from April 6, 2011.

So what are the basics of entrepreneurs’ relief?
Claims can be made on more than one occasion up to a lifetime limit of £10m of qualifying gains. There is no age limit for the relief (unlike the old retirement relief). The main condition is that the qualifying conditions must have been satisfied for at least one year before disposal. Qualifying gains in excess of this limit will be charged at the appropriate rate of 18 per cent and/or 28 per cent, depending on the taxable income of the disposer.

So, subject to satisfying certain conditions, including the cumulative lifetime limit, qualifying gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs’ relief. For disposals made before midnight on June 22, 2010 entrepreneurs’ relief reduces qualifying gains by 4/9 and the remaining 5/9 are then charged at the single 18 per cent rate. This results in qualifying gains being taxed at an effective rate of 10 per cent.

Where individuals or trustees make qualifying gains above the previous £5m limit before April 6, 2011, no additional relief will be allowed for the excess above the old limit. But if they make further qualifying gains on or after April 6, 2011, they will be able to claim relief on up to a further £5m of those additional gains, giving relief on accumulated qualifying gains up to the current lifetime limit of £10m. In determining at what rate(s) an individual should be charged to capital gains tax on any other gains, those gains qualifying for entrepreneurs’ relief are set against any unused basic-rate band before non-qualifying gains.

Access full CPD, technical updates and business generation ideas through Techlink Professional. Go to and click the Contact Us link at the top of the screen and then request your free trial from the dropdown menuW hile over two-thirds of advisers believe (rightly or wrongly) the ban on commission will increase the level of protection business in the market, few expect it to directly influence their own client recommendations. In other words, advisers are saying there will The adviser selection process for HNW protection solutionsundoubtedly be those businesses actively looking to protection to replace lost commission income but that their businesses will not be among them. It is rather like the top 50 funniest moments on TV, climaxing with… the scene where Del Boy falls through the bar and Trigger “pulls a face”. Someone voted for it, but not me guv.

Where there is far more consensus is on the perceived opportunities arising from what we can broadly term high-end protection solutions. Yes, there has been a clear shift to holistic financial planning advice propositions, with the product-centric mentality consigned to yesterday, Phil Wickenden What Advisers Are Sayingbut advisers recognise there are protection solutions that have been under-used to date that will require greater attention to better serve clients’ needs.

The proportion of advisers placing some form of inheritance tax-related cover and (to a lesser extent) employee cover remains moderate across advisory business types but there are stark differences in activity regarding business succession and business continuation.

Yet there is strong appetite for greater engagement. We will be focusing on each of these markets in turn, starting with IHT-related cover next week. But first, some essentials that apply across the high-end protection spectrum:

Price competitiveness remains essential to being in the game but adviser decision processes are far more complex, with the cheapest solution used in only 39 per cent of cases overall. Suitability is king and advisers agree that often flexibility of cover outweighs the downside of additional cost.

Quality underwriting and sound administration are essential determinants of choice and potentially big barriers to business when found wanting. Where there are bad track records, cost becomes secondary to quality of product and under-All quotes taken from interviews with QCF4-qualified financial advisers from fee-charging businesseswriting. Reassurance can be critical here.

The lower the adviser’s past involvement in a market, the greater the value placed on technical and business support, which is key to boosting confidence in the likelihood of a seamless pre-sale to post-sale process.

But support is just as important for those who are more engaged as it is precisely these advisers who are likely to eschew the cheapest option and exclude providers who consistently under-deliver in service and support functions. Technical support and service are vital in dealing effectively with obscure cases and to help IFAs Phil Wickenden is founder of So Here’s The Plangrow business.


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