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13 September 2018
Entrepreneurs’ relief will reduce the rate of tax payable on gains made on shares to 10%. This makes the UK a tax haven for entrepreneurs. There are legislative requirements to satisfy and sometimes tax planning steps to consider – that is our expertise.
If you have any queries please do telephone us. We are always happy to provide a quote.
Our specialist tax solicitors can review your position and let you know where you stand. In some cases we can recommend changes to bring you within the requirements for entrepreneurs’ relief.
You will benefit from entrepreneurs’ relief if:
The HMRC definition of “employee or officer” for entrepreneurs’ relief purposes is simple:
If the share transaction takes place as a company buyback of shares Entrepreneurs’ Relief may be available. But, you will need to have held the shares for at least five years and be employed or a director for at least one year before the buy back. There are other qualifications to satisfy when considering a company buyback of shares.
If you have not held the shares for five years or more the buy back will be treated as a dividend payment and taxed accordingly.
Entrepreneurs’ Relief has been extended to investors. The extension is known as Investors’ Relief. Under the Investors’ Relief regime capital gains made by investors will be taxed at 10% if they satisfy the requirements for Entrepreneurs’ Relief with the following modifications:
There are cases where the question of trading causes a risk that Entrepreneurs’ Relief is not allowed. Sometimes we can put things right before it is too late.
There is no statutory definition of “trade” but what is established is that “trade” includes any venture in the nature of trade.
The trading requirement will be available if the company has ceased trading provided the company:
Many businesses include a mix of trading and non-trading activities. Examples of non-trading activities can include:
The legislation provides that companies and groups with mixed business and non-business trading income can be regarded as trading for the purposes of Entrepreneurs’ Relief if the overall business does not include to a “substantial extent” non trading activities. If a company has foreign operations HMRC will consider all company activities, including activities overseas.
Whilst not legislated, it is widely understood that HMRC interprets “substantial” as over 20%. The next question is how non-trading activities are assessed as substantial. The answer is, HMRC considers:
Cash rich trading companies can struggle to meet the trading company requirements. We investigate the history of the business and the reasons for accumulated cash to ascertain whether the trading status can be supported. The general view taken by HMRC is that cash built up should be extracted as a dividend. For most tax payers the rate of tax applicable to dividends is greater than 10%.
Care is needed to prepare so that a strong argument can be advanced if HMRC challenge.
Entrepreneurs’ Relief is available on the disposal of shares in a holding company of a trading group. The trading status of the holding company will be implied from the trading activities of the subsidiary or subsidiaries provided the holding company owns over 51% of the shares in each subsidiary.
We have seen issues arise where groups trading internationally are precluded under the laws of the home jurisdiction of a subsidiary from controlling as much as 51% of the local business. This is an area we can review for you.
If a company or a member of its group participates in a joint venture the trading status of each company should be considered separately. The trading status of the joint venture company can be “borrowed” by the holding company if the joint venture is considered trading. An individual shareholder holding shares in the holding company will need to establish at least a 5% interest in the trading company.
There are tests set out in the legislation we can run to calculate whether the direct and indirect shareholdings are sufficient to satisfy the conditions necessary to claim Entrepreneurs Relief.
It is not uncommon to find that the lines between trading and non-trading status are blurred. Companies can seek HMRC’s opinion as to its trading status. Obtaining an opinion from HMRC may improve the chances of successfully claiming Entrepreneurs Relief.
An opinion on trading status from HMRC does not mean that the share transaction will qualify for Entrepreneurs’ Relief. HMRC will not comment on the position of individual tax payers.
If an opinion from HMRC is not good, changes can be made to the business to bring it within a trading company. Given this takes time an opinion should be considered sooner rather than later.
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.
We can flag up problem areas and include suggestions for how you can be put into a better position.
The existence of different classes of shares or deferred shares with no capital rights can impact the availability of Entrepreneurs Relief. A review the shareholding structure before disposing of shares is recommended. It might be necessary to cancel or convert shares to satisfy the conditions for Entrepreneurs Relief. Another potential problem area are redeemable shares which convert to cash 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. Similarly problems arises with joint ventures if you do not meet the 5% threshold.
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.
No or inadequate paper work meaning an HMRC challenge cannot be disposed of. For example, shares are transferred to spouses in an attempt to claim entrepreneurs’ relief but without an accompanying job within the business documented by payslips.
Entrepreneurs’ Relief has to be claimed and reported to HMRC on the personal tax return for the year in which the gain arises. Failure to claim means failure to secure Entrepreneurs Relief.
Entrepreneurs’ Relief is more generous to employees selling shares acquired under EMI option than it is for other taxpayer. There are two differences to the rules where EMI options are involved:
It is possible to claim Entrepreneurs’ Relief where an asset but not the entire business is sold. This means that partners in partnership may be eligible to claim Entrepreneurs’ Relief when they leave the partnership. Similarly sole traders can enjoy 10% tax if they sell their business.
To qualify for Entrepreneurs’ Relief the asset disposal must be:
Often partners, who receive a capital sum on retirement, can benefit from Entrepreneurs Relief, if the settlement deed is correctly structured.
Preservation of entrepreneurs’ relief was high on our agenda. Gannons collated the documents to support our claims and presented strong arguments to HMRC. A great outcome!
We used Gannons to incorporate a company and draft bespoke articles. Even at start up stage, they were mindful of preserving entitlement to future reliefs. A very thorough job guys – thanks!