Entrepreneurs' Relief - will you qualify?
The Finance Act 2008 redefined the way in which capital gains are taxed at which time Taper Relief was withdrawn and Entrepreneurs Relief introduced.
Furthermore, the top rate of Capital Gains Tax was increased to 28% with effect from 23 June 2010 so securing entitlement to Entrepreneurs Relief, which provides for an effective tax rate of 10% on up to £10 million of lifetime capital gains, has become ever more important.
Entrepreneurs Relief may be claimed by individuals or trustees who sell shares or securities in a trading company or dispose of the whole or part of a trading business, providing certain conditions are met.
The relief is available on up to £10 million of lifetime gains arising from 6 April 2008. Gains realised before 6 April 2008 do not restrict the availability of the lifetime limit. 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.
The relief is not mandatory and must be claimed on or before the first anniversary of 31 January following the tax year in which the qualifying disposal is made. Where, for example, a gain is made in 2011/12 the claim must be made by 31 January 2014.
The qualifying conditions to claim the relief vary depending on whether an individual is selling shares in a trading company or disposing of an interest in a business. In addition there are different criteria where trustees are seeking to claim the relief.
Shares or securities
In order to claim the relief on the sale of shares, the following conditions must be met:
- The shares must be held in a trading company or in the holding company of a trading group; and
- The individual vendor must be an officer or employee of the company or a company within the same group; and
- The vendor must own at least 5% of the company’s ordinary share capital and be able to exercise 5% of the voting rights within the company.
- All of the above conditions must be met throughout the 12 month period leading up the date of disposal where the company continues to trade to that time; or
- Where the company ceases to trade, the conditions must be met throughout the 12 month period immediately prior to the date of cessation, provided the shares are sold within 3 years of the date of cessation.
Accordingly it is possible to claim the relief where perhaps a company has ceased to trade and entered voluntary liquidation, but capital distributions are made by the liquidator to the shareholders within 3 years of the company ceasing to trade.
Where the above conditions are met, the relief may be extended to include gains made on ‘associated disposals’ of assets owned personally, but used in the company’s trade.
An example is where an individual shareholder personally owns the property from which the company trades and the property is to be sold at the same time as the shares are sold.
Care should be taken however where a full commercial rent is being charged to the company for the use of the property as this may result in the relief being denied or restricted.
Sale of a business or business interest
Where an individual is in business as a sole trader or in partnership, the disposal of that business interest may qualify for the relief providing the following conditions are met:
- The business must be a trade, profession or vocation. This would include commercial letting of furnished holiday accommodation in the UK or European Economic Area; and
- The individual must have owned the business or held an interest in the business throughout the 12 month period leading up to the date of sale.
In the event that the business ceases to trade but is not sold, the relief may be claimed against capital gains arising on assets used in the business, providing these are sold within 3 years of the business ceasing to trade.
For trustees to qualify for the relief on either the sale of shares or on business interests, the following conditions need to be met:
- The beneficiary must hold an interest in possession in at least the part of the trust property being sold; and
- In the case of shares, the beneficiary must be an officer or employee of the trading company and own at least 5% of the ordinary share capital and voting rights.
The second condition must be met throughout the 12 month period leading up to the date of sale.
What to do next
Entrepreneurs’ relief is a relatively new relief and in our experience entitlement to the relief is often misunderstood. There are many pitfalls and early consideration of the key issues is crucial so that planning opportunities may be identified in good time.
To ensure that you qualify for this valuable relief it is essential that you review your entitlement to the relief at the earliest opportunity. If you would like to know more about Entrepreneurs Relief, please contact your usual contact at Wilkins Kennedy or;
Senior Tax Manager
T: 01962 852263
You can download the WK Entrepreneurs Relief flyer for easy referencing.
Information on Wilkins Kennedy website is not intended to give specific technical advice and it should not be read as doing so. It is designed only to alert you to some of the key issues. The full provisions are long and complex and professional advice should always be sought before action is either taken or refrained from.