If you are contemplating selling your business you simply cannot afford to miss out on Entrepreneurs Relief (ER), not when it can reduce the tax rate payable from 28% to just 10% and thereby enables you to keep 18% more of the gains you make!
Briefly, the relief is available to:
- Sole traders and partners who sell the whole or part of their businesses.
- Company directors and employees who sell a ‘material stake’ in a ‘qualifying company’. A ‘material stake’ means that the shareholder works for the company, owns at least 5% of the share capital and is able to exercise at least 5% of the voting rights
- Company directors and employees who acquired shares under an EMI option
However, there are a number of detailed conditions that need to be met and it is all too easy to lose the relief if you aren’t aware of the ways in which relief can be invalidated through ‘disqualifying events’ or don’t make the claim in good time. Consider the recent case of McQuillan (TC5074):
The taxpayer and his wife each owned 33 of the 100 ‘ordinary shares ‘in issue (ie, comfortably more than 5% each of the ‘ordinary share capital’) .
However, the company also had £30,000 ‘redeemable shares’ in issue, which were owned by ‘X’. The redeemable shares had no entitlement to dividends and no voting rights so, in effect, X had simply lent £30,000 to the company with the loan being secured in the form of redeemable shares.
Unfortunately, Entrepreneurs' Relief defines ‘Ordinary Share Capital’ in ITA 2007, s 989 as: 'all the company's issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits.'
HMRC's argument was simple to make and easily won. The redeemable shares did not entitle the holder to a fixed dividend, so the redeemable shares were ‘ordinary shares’ for the purposes of ER, and the claim for relief therefore failed.
The above result seems manifestly unfair and against the spirit of the legislation which is designed to foster the entrepreneurial spirit; however, that doesn’t change the outcome. If the McQuillans had obtained professional advice before selling their shares the problem would have been recognised and corrected.
There are many more other potential complications with ER, so don’t let something similar happen to you.
If you are thinking of selling up, either now or sometime in the future, come and talk to us and get proper advice.
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