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.
We act for individual shareholders in private companies and partners seeking to claim Entrepreneurs Relief on their capital disposals. We also deal with resolving challenges made by HMRC to claims for Entrepreneurs Relief.
Securing Entrepreneurs Relief:
Entrepreneurs Relief – potential tax savings
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%.
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.
When we act for you we will review the legislative requirements and follow through the tax requirements into the legal documents we review or draft.
Entrepreneurs Relief for trading company share sales
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 one year, an:
- Officer of the company or subsidiary, or
- Employee of the company or subsidiary, and
- The taxpayer holds, for a year, over 5% of the ordinary voting share capital.
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;
- A written employment contract is indicative of employment and will assist if there is an HMRC challenge.
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. Entrepreneurs Relief can be denied if the shareholders stay in the business but do not get commercial salaries. There is scope for HMRC to attempt to assess some of the capital gain as income.
There can be a difficulty if at the time any earn out is paid the tax payer has left the business. There may be solutions we can offer depending upon the facts.
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.
Entrepreneurs Relief on an asset sale
It is possible to claim Entrepreneurs Relief where the asset but not the entire business is sold. As with a share sale, there are conditions to be satisfied which we will explain to you.
Entrepreneurs Relief and investments – exclusion of relief
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.
Entrepreneurs Relief on winding up – exclusion of relief
Entrepreneurs Relief is usually available when a company is wound up. HMRC can deny Entrepreneurs Relief if the company is wound up for tax avoidance reasons, for example when a shareholder closes one business to open the same business the next day. HMRC interprets a tax avoidance motive widely and there is no clearance procedure to clear the doubt.
Every situation is different but we will guide you through the grey areas and uncertainties. Your documentation trail will be important if HMRC do challenge.
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.
Entrepreneurs Relief – areas where care is needed
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.
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.
- The existence of redeemable shares which convert before or on business sale.
- A deferred buy back where the shareholder does not remain an employee of the company until the date of the last tranche.
- The shareholders wind up the company and set up a company to carry out the same or similar trade shortly thereafter.
- EMI options are not held for a minimum of 12 months.
- 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.
- Where the partner is leaving a partnership or LLP and under the terms of departure the partner receives 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 assesses assets transferred as triggering a tax charge.
- Re-organisations such as demergers and reconstructions always call for a careful eye on the preservation of Entrepreneurs Relief.
Entrepreneurs Relief HMRC reporting
Entrepreneurs Relief has to be claimed and 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 of capital gains tax deadlines to satisfy. We explain how to do this and when to pay the tax arising.
Entrepreneurs Relief and EMI options
The standard rate of capital gains tax is 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!
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. 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 tax at higher rates.
Our recent instructions include:
- Acted for the shareholders of a software company being sold for a considerable sum – we reviewed earn out provisions and advised the shareholders on choices relating to the taxation of earn outs.
- Acted for an entrepreneur who was planning 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.