Are you selling your shares in a private company or the business and assets of a sole trader or partnership? Have you claimed Entrepreneurs’ Relief (ER)? If not, you may be missing a trick! Corporate Partner, Clementine Duckett explains.
ER is a relief from Capital Gains Tax (CGT) available to individuals (and trustees) who realise qualifying gains. The effect of the relief is to apply a CGT rate of 10% to the first £10 million of qualifying lifetime capital gains. In the absence of ER, gains are taxed at 18% to the extent that the individual’s taxable income for the year falls below the basic rate band upper limit, and 28% on the balance. As the relief can reduce the effective rate of tax from 28% to 10%, it can be worth up to £1.8 million in tax savings for each individual.
WHAT IS A QUALIFYING CAPITAL GAIN?
1. Shares or securities of a trading company
For at least one year up to the date of the disposal:
- the individual must have held at least 5% of the ordinary share capital of the company and be able to exercise 5% of the voting rights within the company (unless the shares were acquired under a qualifying EMI share option); and
- the individual must have been an officer or employee of the company or a company within the same group.
2. The whole or part of a business as a going concern
- The individual must have owned the business (as a sole trader/partnership) for at least one year prior to disposal.
Disposals by sole traders converting into a partnership, part disposals by existing partners when a new partner joins and full disposals by partners all potentially qualify for ER.
3. Personal assets used by a trading company/partnership
- The disposal must be “material” and the partner or shareholder is withdrawing from the business.
- The asset was used by the partnership or company for the purposes of its business throughout the period of one year ending with the date of the disposal (and not for unconnected purposes).
4. Assets formerly used in a qualifying business which has ceased trading (rather than being sold as a going concern)
- The business has been owned by the individual (whether as a sole trader or in partnership) throughout the period of one year ending on the date on which the business ceases to be carried on; and
- the business ceased to be carried on in the period of three years ending with the date of the disposal.
ER must be claimed; it is not awarded automatically. The claim must be made on or before the first anniversary of the 31 January after the tax year of the disposal.
This article just provides an overview of the law in this area. You should talk to our Corporate team for a complete understanding of how it may affect your particular circumstances.
Call Clementine now on 01423 502211 or email to arrange a call with the Corporate law experts at LCF Law today.