Prior to 5th April 2008, owner managed businesses were treated favourably by the UK tax system as they were able to benefit from business asset taper relief which, in the majority of situations, reduced the effective rate of capital gains tax payable on the disposal of their business to only 10%.
In his pre budget speech in October 2007, the Chancellor announced a major reform of the capital gains tax regime affecting the way in which capital gains tax would be calculated from 6th April 2008.
The main amendments, effective from 5th April 2008, included the abolishment of Taper Relief and Indexation Allowance and the introduction of a new flat rate of capital gains tax of 18%.
The proposals for removing business asset taper relief were met with very strong opposition from business owners and the Chancellor responded quickly by introducing a new relief - 'Entrepreneurs Relief' (ER).
The effect of Entrepreneurs Relief is that the capital gains tax payable on the disposal of business assets remains at 10% on gains up to £1m but gains in excess of £1m will now be charged at 18% (previously 10%).
Still good news for the small owner managed business owner - you might think! The sting in the tail is that, as with taper relief, there are strict criteria that must be satisfied in order to qualify for Entrepreneurs Relief. The main provisions include;
ER is available on a disposal of a business (i.e. sole trader or partnership) and on a disposal of shares in a trading company;
In most cases you must have owned the business or shares for at least 12 months.
For shares, the company must be a trading company or the holding company of a trading group and you must be a director or employee of the company and hold at least 5% of the share capital (and 5% of the voting rights).
The availability of ER should not be taken for granted and in many cases some advanced planning will mean the difference between paying CGT at 10% or 18%. In most cases, it will be too late to maximize the availability of ER a month or two before a sale.
We would be happy to undertake a review of your ER status and offer expert guidance on more detailed transactions including;
Shareholding structure - is the company's share capital structured to optimize the availability of the relief?
Should shares held by family trusts be transferred back to the owner manager?
Should employees holding share options over at least 5% of the share capital and voting rights exercise their options in order to gain their 12 month qualifying period for the relief.
Will the crystallization of an earn out right satisfied in loan notes qualify for the relief?
Will the shares that you hold in the acquiring company that you acquired as part/full consideration for the sale of your business pre April 2008 qualify for relief? If not, you may need to make an election to 'cash in' on the taper relief that you had already accrued pre April 2008.