Entrepreneurs’ relief provides relief from capital gains tax (CGT) on qualifying business disposals. Relief is available on gains up to the lifetime limit provided that the necessary qualifying conditions are met. Gains qualifying for relief are taxed at a reduced rate of 10% (as opposed to 18% or 28%).
The relief is a valuable relief. The maximum lifetime limit for disposal from 6 April 2011 is £10 million. This provides a potential CGT saving of up to £1.8 million per person.
The relief is available to individuals and certain trustees. It is not available to companies. In particular, it can be claimed by those who hold shares in a personal company, provided that the necessary conditions are met.
The relief is available in respect of qualifying business disposal. A qualifying business disposal is the disposal of all or part of a business, the assets of the business after it has ceased or shares in a company.
The availability of most tax reliefs is contingent on certain conditions being met. Entrepreneurs’ relief is no different.
However, it is not enough to meet the conditions at the date of disposal. To qualify for relief they must have been met throughout the qualifying period. This is a period of one year that ends on the date that the business was disposed (if all or part of the business is sold) or the date on which the business ceases.
Where the disposal is of shares and securities, throughout the one-year qualifying period the company must be the individual’s personal company, the company must be either a trading company or a member of a trading group and the individual must be an officer or employee of the company (or of one or more members of the trading group).
An individual’s ‘personal company’ is one in which he or she holds at least 5% of the ordinary share capital and at least 5% of the voting rights.
As noted above, the qualifying conditions must be met in the year preceding the disposal or cessation. Consequently, availability of relief depends on the individual holding at least 5% of the shares, 5% of the voting rights and being an officer or employee of the company throughout the year in question. Some forward planning is essential.
This can be claimed separately by husbands and wives and by civil partners. Other family members can also claim the relief in their own right, making it possible to shelter considerable gains. However, each must satisfy the qualifying conditions for the requisite one year period.
William holds 97% of the shares in WW Ltd and his wife holds the remaining 3%. Both are directors of the company. The shareholdings have been unchanged since the company was set up 20 years ago. They wish to retire and sell the shares in the company realising a total gain of £10 million.
William qualifies for entrepreneurs’ relief. Wendy does not. As William’s portion of the gain (£970,000) exceeds the maximum lifetime limit, only gains up to William’s limit of £5 million qualify for relief and for the reduced rate of CGT of 10%. The total CGT bill (assuming a rate of 28% and that they both have other gains in excess of the annual allowance) is £1.9m ((28% x £5m) + (10% x £5m)).
William can transfer 47% of the shares in the company to Wendy on a ‘no gain no loss’ basis so that they both hold 50%. However, for Wendy to qualify for entrepreneurs’ relief this must be done at least a year before the disposal.
If William transfers shares to Wendy and they wait at least a year before disposing of their shares, the full gain of £10 million would qualify for entrepreneurs’ relief, reducing the CGT bill to £1 million – a saving of £900,000.
Transfer shares and/or appoint non-working spouses as officers of the company at least a year before the planned disposal or cessation date.
By Sarah Bradford