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Selling your business – make sure you get full relief!

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Friday March 4, 2011 at 10:00am

With few tax-breaks available to business owners at the moment it is worthwhile knowing about one that is still very much still alive and kicking and can significantly benefit business owners planning to sell.

Entrepreneur’s relief was introduced in 2008. From 23rd June 2010 the first £5 million of gains that qualify for relief will be charged to Capital Gains Tax at an effective rate of 10 per cent. Gains in excess of £5 million will be charged at the normal 18 per cent or 28 per cent rate dependent upon an individual’s taxable income rate.

An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £5 million of gains qualifying for relief. Prior to June this limit was £2m.

As always with tax reliefs it is important to be sure that the precise conditions of the relief are met and points to watch out for in Entrepreneur’s Relief are:

  • Sole traders or partners must sell a business or a viable part of a business capable of operation in its own right to qualify for Entrepreneur’s relief. Selling an individual business asset will not qualify unless this happens after the business has actually ceased, and within three years of that cessation.
  • Sole traders and partners must have carried on the business for at least 12 months prior to the date of sale or up to the date of cessation of trading.
  • Entrepreneur’s Relief is only available on sales of shares where those are shares in a trading company or the holding company of a trading group. Any significant assets or activities within the company or group which are of a non-trading nature (for example the holding of an investment property) could cause problems in this regard and a careful review will be required. Sometimes very large amounts of cash held by a company which significantly exceed business requirements might be regarded by H M Revenue as a cash investment in this context. 
  • Where a sale of shares is concerned, the company must also be the shareholders “personal” company. This means that they must have at least 5% of the ordinary share capital of the company, 5% of the voting rights in the company and be an officer or employee of the company and they must satisfy those tests for at least 12 months prior to the disposal of the shares. This does not mean that all the shares being sold necessarily need to have been owned for 12 months, provided that the 5% test has been satisfied for the 12 month period. In a family company some shareholders may not be employees or small shareholdings may be held below the 5% requirement. In these circumstances planning ahead of any sale of a company may be important to try and ensure that these requirements can be met in the crucial 12 month period prior to sale.
  • If a gain arises on shares in a trading company because it is wound-up after it has ceased trading, then the personal company conditions will have to be met in the 12 months up to the date that trading ceased and the winding up will have to take place within three years of the cessation of trading.

Complicated? Yes, but not with the right advice. The above is not exhaustive and your accountant should be able to help you understand whether you qualify – in fact if you are thinking of selling your business they should automatically talk to you about this option. If they don’t you might question their abilities in tax planning!


Andy Parker

Chartered Accountant and Tax Advisor Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here