Entrepreneurs' Relief - Business owners urged to plan carefully

Entrepreneurs banking on the concessionary 10% capital gains tax rate on business sale proceeds need to plan carefully and think well ahead, company owners have been told.

Rushed legislation – following the government’s climb-down after it intended to enforce a new flat rate 18% on capital gains – means that family businesses could fare much better than sole or dual ownership operations and limited liability partnerships are expected to grow in popularity.

Terri Halstead, tax partner at the Birmingham office of HW, Chartered Accountants said it was clear that some family companies were facing difficult issues.

Entrepreneurs' relief only available for shareholdings of 5% or more

“Entrepreneurs' relief is only available to those with a 5% or more shareholding and that shareholding needs to have been held for at least 12 months. In addition, the shareholder must be an employee or office holder of the company,” said Terri.

“Each shareholder is treated as an individual which means that in theory, there could be a company sale with 20 shareholders, each qualifying for entrepreneur’s relief, with the result that a gain of up to £20m would be taxed at ten percent.”

The reality though, is that the majority of family businesses will have different shareholding allocations. If they are to make maximum use of entrepreneur’s relief, they will need to transfer shares from one to the other or introduce, perhaps, other family members, in order to benefit.

However, whilst shareholders have to hold at least 5% of the shares, there is no requirement for partners.

“Whilst a company is limited to 20 individuals, all qualifying for relief, a partnership could have 500 or even 1000 partners – each of whom would qualify.

Limited liability partnerships can help to spread Entrepreneurs' Relief

“Limited liability partnerships (LLPs) are likely to be favoured therefore over limited companies – particularly where the intention is to develop a business for sale. In consequence, we could see more start up through partnerships – an important point for the future,” said Terri.

Company owners are also being warned about associated disposals.

“Like retirement relief, entrepreneur’s relief is extended to the gain on a disposal of any associated asset if that disposal is undertaken at the same time as a sale of shares in the business itself,” she said.

“Imagine a business owner that disposes of the shares and at the same time, wishes to sell the property – that is in his and his wife’s name – from which the company operates. In this instance, the sale of the freehold may not qualify for entrepreneurs’ relief.”

Mrs Halstead said entrepreneurs needed to review their assets and shareholdings and think ahead.

“Entrepreneurs not only need to be quick thinking when it comes to business – they also need to look and plan well ahead if they are to gain maximum advantage from this taxation relief,” she added.