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Selling your business – Entrepreneurs’ Relief

Entrepreneurs’ Relief (ER) is a valuable benefit to business owners looking to sell their companies, offering a special 10% rate of Capital Gains Tax on all lifetime gains up to a limit of £10 million.

As long as you have been an officer or employee of the company and have owned at least 5% of the ordinary share capital for at least the last year, this relief could greatly reduce your tax bill when you come to sell your shares.

Do I qualify for Entrepreneurs Relief?

Whether you’re looking to dispose of all or part of your business, personal shares or securities, or any other assets, there are different criteria you’ll have to meet.

  • Selling all or part of the business

To sell your entire business or just a part of it, you will need to be either a sole trader or business partner that has owned the business for at least one year before the date you come to sell it.

The same conditions also apply if you choose to close the business instead. In this case, you’ll need to dispose of all business assets within three years to qualify for the relief.

  • Selling shares or securities

You’ll also need to have been an employee or office holder of a trading-based company for at least one year before you can sell shares and securities with Entrepreneurs’ Relief.

In addition to this, you’ll need to have either 5% shares and voting rights in the company or have been given the option to buy the Enterprise Management Incentive (EMI) shares at least one year before you sell them.

  • Selling assets you lent to the business

Finally, if you wish to sell assets that you have lent to the business, then you will need to have sold at least 5% of your part of the business partnership or your own shares in the personal company.

You must also have personally owned the assets but allowed the business to use them for at least one year up to the date you sold your business or shares or when the company close.

You may also qualify for this relief if you are a trustee selling assets held in the trust. Speak to your TWP accountant for further guidance.

What if I don’t meet these criteria for Entrepreneurs’ Relief?

In the past few years, HMRC have come under criticism by Parliament for not looking into enough Entrepreneurs’ Relief claims; leading them to take a much harsher stance on those looking to make a claim.

Two recent court cases in particular have highlighted the dangers of wrongly claiming ER.

The first was a small company formed in 1995. The taxpayer in question was both one of the founding shareholders of the firm and a company director.

In February 2009, it was decided that the company would purchase the majority of said taxpayer’s shares, and that his employment would be terminated, he would resign as director, and that he would receive an ex-gratia payment from the business.

Three months later in May, a general meeting approved this decision to buy back the shares and set the wheels into motion. However, all documentation the company had suggested the taxpayer’s employment had been terminated in February.

This triggered an investigation by HMRC which found that the taxpayer was neither an officer or employee of the company for the period of a year prior to selling his shares; meaning he did not qualify for entrepreneurs’ relief.

As the taxpayer’s employment had ended a few months prior to the disposal of his shareholding, he was charged the full amount of capital gains tax on the profits of the sale. This decision was upheld by the Tribunal.

The second case saw a company equally owned by two couples go before a higher court. Couple A owned 33% of the shares in the business, with the balance owned by couple B. From this, it was clear that they met the 5% for qualifying for ER.

However, trouble arose when the business received a loan of £30,000 by other shareholders before Couple A could sell; converting into 30,000 new shares in the business.

When Couple A attempted to claim Entrepreneurs Relief on the sale of their shares, HMRC argued the taxpayers had not held at least 5% of the ordinary share capital of the company for the year prior to the sale. They lost their case in court and were made to pay the full cost of their capital gains tax.

What should you do?

If you’re planning on selling your company shares in the near future, it is essential that you ensure you meet the criteria for Entrepreneurs Relief before making a claim.

Make sure your claim goes smoothly by speaking to your TWP accountant today. Please call us on 01932 704700 to discuss how we can help you.

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