Recent cases successfully establishing Entrepreneurs’ Relief
We have dealt with and resolved a great many 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 needed is always a good move. If HMRC scrutinises a transaction then the availability of good documentation is often the determining factor. Documentation can make the difference between reducing the rate of capital gains tax to 10% or paying tax at higher rates.
Our recent cases where we managed to secure the more favourable 10% tax rate available under entrepreneurs’ relief include:
Transfer of shares to spouse to double up £1 million limit
Gannons acted for an entrepreneur who was planning a sale of his private company. We dealt with the transfer of shares to his spouse so that the lifetime allowance for her of £1 million was fully utilised. Shares can be transferred between spouses free of capital gains tax. But, when the shares are transferred to a third party on the sale of the company capital gains tax applies in the normal way.
Our client came to see us in good time before the sale of the company. This meant that we were able to advise that his wife would need to be working in the business either as a director or an employee for at least one year before the sale. We drafted the employment contract and made sure she was on the payroll. It is important that some work is actually undertaken by the spouse – in this case assisting with marketing.
The company was sold for more than £2 million but 10% CGT was paid on the first £2 million by the couple as it was covered by entrepreneurs’ relief. CGT at 20% was paid on the balance over £2 million.
We 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. The director was planning on retiring and then selling his shares. We spoke to him in time and advised that either an employment or directorship had to exist at the point of sale.
Good practice is for the directorship and or employment to terminate at least one week after the company has bought back the shares and paid the shareholder.
Retirement from partnership
We dealt with the retirement of a partner from a hedge fund. His company made him a sizeable capital payment following the disposal of his assets.
Trading company status where there was a large cash balance
We acted on behalf of a company producing padlocks. The company had £1.2m cash representing profit accumulated over seven years. The business kept the cash with a view to investing it in a new warehousing facility. So far, warehousing proved the biggest cost of the business. The 100% shareholder was offered to sell 50% of shares in exchange for a warehouse which he wanted to take up but feared that his shares will not qualify as shares in a trading company.
We prepared a clearance application to HMRC and successfully argued that the company’s trading history indicated incidental investment activities which do not qualify as substantial. HMRC confirmed trading status.
Mixed trading and non-trading activities
We acted for a mattress manufacturer. The client owned two companies: a trading company producing mattresses and a property company, holding a number of flats for rental. We suggested an alternative structure whereby the non-trading activities of the group would be spread over a number of companies. That made the trading companies’ investment activities insubstantial. Based on our restructuring, we helped the client incorporate the new companies and allocate the assets accordingly.