- Catherine Gannon
- Updated: Fri, 24th Feb 2017
Entrepreneurs Relief can reduce your Capital Gains Tax (“CGT”) on gains arising on the sale of e.g. shares, certain assets, leaving a partnership or LLP by half. There are legislative requirements to satisfy and sometimes tax planning steps to consider – that is our expertise.
Our services relating to securing Entrepreneurs Relief include:
We act for individual shareholders and partners involved with a transaction such as a share transfer, share buy back, corporate re-organisation, a gift of shares or the disposal of assets. Our transactional services will include tax advice when are tasked with completing the legal contracts.
How to reduce capital gains tax payable on a share transaction
If you satisfy the legislative requirements for Entrepreneurs Relief your effective rate of tax payable on the gain made following a sale of shares will be reduced to 10%.
We set out below an outline of the legislative requirements. When we act for you we will review the legislative requirements and look to follow through the tax requirements into the legal documents we review or draft.
Trading company share sales and Entrepreneurs Relief
The taxpayer benefits from Entrepreneurs Relief if:
- The company, or the holding company of a trading group, is trading;
- The taxpayer has been, for at least 1 year, an:
- Officer of the company or subsidiary, or
- Employee of the company or subsidiary,
- Note, the taxpayer is not required to have actually worked a minimum number of hours; AND
- The taxpayer holds, for a year, over 5% of the ordinary shares, so the taxpayer has over 5% of the voting rights.
Definition of employee or officer for Entrepreneurs Relief purposes
The HMRC definition of “employee or officer” for Entrepreneurs Relief purposes is simple:
- There is no requirement as to hours or salary;
- Non-executive directors and company secretaries count as officers;
- The officer must take on the responsibilities and duties of the role. However, in the run up to a sale a non-executive director or new employee may be very helpful.
Earn outs and Entrepreneurs Relief
We advise on the implications for Entrepreneurs Relief where the sale consideration consists of cash on disposal plus further cash if earn out targets or retention periods are satisfied. The difficulty here is if at the time any earn out is paid the tax payer has left the business Entrepreneurs Relief will not be available. We can provide solutions and structures which bring the earn out within the Entrepreneurs Relief regime.
Company share buy backs and Entrepreneurs Relief
If the sale of shares takes place as a Company buyback of shares with some pre-planning and structuring depending upon the facts, Entrepreneurs Relief may be available. We prepare share buy back documentation and obtain HMRC clearance on a share buy back to ensure the departing shareholder obtains Entrepreneurs Relief.
Availability of Entrepreneurs Relief on an asset sale
We deal with situations where the asset but not the entire business is sold. We advise on Entrepreneurs Relief as part of dealing with the business transfer documentation.
Entrepreneurs relief applies to a disposal of qualifying assets in a business which has ceased. These assets had to be used for business purposes, when the business ceased to be carried on, if the business:
- Had been owned by the individual continuously for one year, and ended when the business ceased; AND
- Ceased to be carried on for three years, following the date of the disposal.
The question of what is a cessation of trade is not always easy to determine for tax payers who are retiring. There is a body of case law on the subject – in some cases HMRC are successful, whereas in others HMRC fail in their challenge to deny Entrepreneurs Relief. We track latest case law and if appropriate, use it to advance your position.
Assets used for investment purposes
Assets excluded from Entrepreneurs Relief include assets:
- Held for investment purposes;
- Not used for business purposes.
This condition can catch companies with large cash deposits and planning is required.
We do deal with applications to HMRC for a non-statutory clearance where there is doubt over the trading status.
Partners or shareholders who dispose of personal assets, used in the business, can benefit from Entrepreneurs Relief. The asset disposal must be:
- Material, and the partner or shareholder must be withdrawing from the business;
- Of an asset used by the partnership or company for business purposes for one year ending on the disposal date, and not for unconnected purposes.
Often partners, who receive a capital sum on retirement, can benefit from Entrepreneurs Relief, if the settlement deed is correctly structured.
Typical areas where we can solve issues relating to asset sales
In our experience, care is needed as eligibility to Entrepreneurs Relief can be lost in the following types of cases:
- Where the partner is leaving a partnership or LLP and the terms of departure the partner to a capital payment on leaving – the risk is HMRC view leaving payments as being income;
- Where a partnership is converting to a limited company – the risk is HMRC asses assets transferred as triggering a tax charge;
- Where as part of succession planning in owner managed businesses assets are sold off;
- Re-organisations such as demergers and reconstructions always call for a careful eye on the preservation of Entrepreneurs Relief.
Common pitfalls which cause loss of tax savings
There are a variety of pitfalls where tax payers may not qualify for Entrepreneurs Relief. Some of the problems can be rectified if they come to light before it is too late. Our review service will flag up problem areas and include suggestions for how you can be put into a better position.
Entrepreneurs Relief is available for up to £10 million lifetime gains, potentially a £1 million tax saving. Couples, i.e. husbands, wives and civil partners, are each eligible for up to £10 million of lifetime gains if they each satisfy the relevant conditions at the time of sale.
Typical problem areas where entrepreneurs relief can be denied
- The existence of different classes of shares or deferred shares with no capital rights can impact the availability of Entrepreneurs Relief so it is important to review the shareholding structure before disposing of shares. It might be necessary to cancel or convert shares to satisfy the conditions for Entrepreneurs Relief.
- A share reorganisation whereby a new holding company acquires your company’s shares, offering shares in the new holding company. The tax payer might not meet the 5% threshold;
- No or inadequate paper work meaning an HMRC challenge cannot be disposed of;
- The company enters into a joint venture. The tax payer might not meet the 5% threshold;
- A share purchase agreement that contains earn-out provisions;
- Sale of part of a business;
- Shares are transferred to spouses without an accompanying job within the business documented by payslips.
Entrepreneurs Relief has to be reported to HMRC on the personal tax return for the year in which the gain arises. To avoid interest and penalties there are strict payment deadlines to satisfy. We explain how to do this and when to pay the tax arising.
Entrepreneurs Relief under HMRC approved employee share plans
The standard rate of capital gains tax are reduced for employees disposing of shares received under EMI scheme.
Entrepreneurs Relief is more generous to employees selling shares acquired under EMI option than it is for other taxpayers. There are two differences to the rules where EMI options are involved:
- The requirement to hold 5% or more of the ordinary share capital does not apply;
- There is no requirement to be a shareholder for one year as for EMI options the rule is you have to hold the option for one year!
Track record in successfully claiming Entrepreneurs Relief
We have dealt and resolved a great many set of problems in our time. Our clients work with us because we combine legal expertise with tax expertise. not only provide the tax expertise. A reduction in the number of professional advisers is always a good move.
If the transaction is scrutinised by HMRC the availability of good documentation is important and can be the difference between reducing the rate of capital gains tax to 10% or paying at higher rates.
Our recent instructions include:
- Acted for the shareholders of a software company being sold for a considerable sum – we reviewed the earn out provisions and advised the shareholders on choices relating to the taxation of earn outs.
- Acted for an entrepreneur who was planning on a sale. We dealt with the transfer of shares to his spouse so that the lifetime allowance for her of £10 million was fully utilised and ensured she was on the payroll in good time.
- Acted for a director shareholder who was leaving the company following shareholder disputes on the taxation of proceeds received following a buy back of shares by the company.
- Dealt with the retirement of a partner from a hedge fund who was paid a sizeable capital payment following the disposal of assets.
- Advised a vet on her exit from the partnership and payment of taxes on the profits she had made.
We are one of the few boutique, commercial solicitors with tax expertise. Why not call or email me to arrange an informal discussion about qualifying for this very attractive 10% CGT rate.