Entrepreneurs’ relief: don’t miss out (April 2008)
Entrepreneurs' relief from Capital Gains Tax (CGT) has replaced Business Asset Taper relief (BATR), and business owners should be aware of the new qualifying conditions, as well as how to plan for maximum relief.
Entrepreneurs’ relief may be available on disposals of business assets (which can include shares in a qualifying company) on or after 6 April 2008; it is not automatic but needs to be claimed. Entrepreneurs’ relief reduces the rate of CGT from 18% to 10% on qualifying gains. It has a lifetime limit of £1 million of gains, and applies to an individual’s personal gains and gains made by certain trusts on assets held for their benefit.
The test of what a business asset is at any time is the same as for BATR, i.e. that the business carried on must be a trade, although a company may have other activities provided they are not ‘substantial’ (accepted by HM Revenue & Customs as not amounting to more than 20% of the company’s activity). The asset/company must have passed the test throughout the year ending with the earlier of the date of disposal and the date of cessation of business; and the disposal must take place within the three years after the date of cessation.
Timing of disposal can be vital
This is where the first pitfall arises: if an asset used in the business is sold before the individual sells either the business or his shares, and before the business ceases, then that disposal does not qualify for entrepreneurs’ relief.
It is common enough for business owners and shareholders, who are planning to make a staged withdrawal, to look for buyers for their assets: a prime example would be to sell the premises used by the business to a landlord before selling the business itself. Attention to detail in the planning stages can preserve the relief.
Selling assets separately can be advantageous
Where the individual makes a disposal consisting of different assets (e.g. shares of different classes or assorted assets of the business, such as goodwill, fixed plant and business premises), all the gains and losses on those assets are aggregated and entrepreneurs’ relief applies to the net gains.
This creates the planning point. It may be worthwhile deliberately separating the sale assets which will generate a loss, so that those losses may be offset against other gains that are chargeable at the full 18% rate, rather than the business assets charged at 10%.
Entrepreneurs’ relief and trusts
The entitlement to entrepreneurs’ relief on shares depends entirely on there being an individual who qualifies and whether the company is his or her ‘personal company.’ Where a trust is involved, the trustees can only claim part of the entrepreneurs’ relief that would otherwise be available to the relevant beneficiary. A trust cannot claim entrepreneurs’ relief unless it holds the asset on an unlimited life interest in possession for the beneficiary concerned.
Shares in a personal company
A business can only be the ‘personal company’ of an individual who:
- is an employee or office holder. This is not the same as BATR where no employment condition applied to private companies; and
- owns a holding that entitles him/her to at least 5% of the company’s ordinary share capital and 5% of the voting rights.
The ‘employment or office holder’ requirement does not include any minimum working hours test, but, before a shareholder takes on an office or employment, he needs to consider the Companies Act requirements on directors and office holders and the wider consequences of becoming an employee.
A trap for trustees
The personal company requirement means that if a director’s shares are all held on trust, no entrepreneurs’ relief is available on those shares and he should think about taking at least a 5% holding into personal ownership.
It is not possible to give general guidance on exactly how to maximise entrepreneurs’ relief, but every business should take steps to assess the situation, and to prepare. You are welcome to contact your usual Baker Tilly representative for further discussion and specific advice.
© 2008 Baker Tilly UK Group LLP, all rights reserved, 04.08
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