Both sole traders and limited company owners can benefit from Entrepreneur’s Relief, which allows a trading business to experience reduced rates of capital gains when selling a business or ceasing to trade.
The relief has been scaled up since it was first introduced in 2008 where its starting point was set at lifetime gains of up to £1 million but now with the level of £10 million in the current tax year 2019/20, there is a potential life time saving of tax of up to £1 million, so a very important tax relief all business owners should be aware of.
Limited company conditions
As with all tax reliefs available to business owners, there are certain conditions to be met to fully enjoy the benefits of Entrepreneur’s Relief and these conditions, as at 6 April 2019, must be met for two years prior to disposal, as detailed below:
- The limited company must be trading or part of a holding company of a trading group.
- You must be an ‘officer’ – in other words a director – or employee of the limited company.
- You must hold at least 5% of the ordinary share capital in the company.
- You must be able to exercise 5% of the of the voting rights by virtue of your shareholding.
- You must be beneficially entitled to at least 5% of the profits available for distribution to shareholders and, on a winding up, be beneficially entitled to at least 5% of the available assets.
- In the event of a disposal of 100% of the company’s ordinary share capital, you would be beneficially entitled to at least 5% of the proceeds.
These conditions were agreed as at the current 2019/20 tax year, but only after consultation by the Revenue with professional bodies and companies, who were initially concerned that HMRC would amend the tax relief so that those business owners with non-standard class of shares would lose out.
For the business owners with ‘ordinary’ shareholdings the only real change affecting them is the extension of meeting the conditions from one year to two years prior to disposal. Those with different class shares should be careful they meet the above revised conditions to benefit from this very valuable tax relief.
Another point to consider is that if there is a planned change to your business share structure at any time during trading, the two year window will reset from the date of the new structure so we suggest any review of shareholdings in your company should be looked at carefully and multiple planned changes should ideally happen at the same time.
How can we help?
If you require further advice on the structure of your business, please contact us to help you through the process as tax efficiently as possible.
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business so you can invest your hard earned cash back into your business. We strongly recommend you speak with a tax and accounting specialist like Southside Accountants. Please contact us to see how we as your accountants can help you run your business effectively.
Southside Accountants provide accountant services, including tax return services, to small businesses in the UK.
Written by Shaima Todd.