Finding relief amidst a taxing share sale (Birmingham Post article 29.08.2019)

You are a small businessman who has built up a nice little company but you are no spring chicken anymore.

You are fed up of the uncertainties surrounding Brexit and worried about what sort of government might emerge should there be yet another General Election.

So, you decide to sell up.

All very understandable … but if this is the path you intend to take then first explore the opportunities offered by Entrepreneurs Relief (ER).

Because Capital Gains Tax comes into play – though remember it is not the amount of money you receive for the asset but the gain you make that is taxed. Broadly, to calculate the gain, you compare the sales proceeds with the original cost of that asset.

ER cuts in half the amount of CGT payable when you sell shares in all or part of your business.

It results in a tax rate of 10 per cent on the value of the disposal. There is no limit to how many times you can claim and you can claim up to £10 million of relief during your lifetime.

However, you need to be aware of two specific changes unveiled in the 2018 Budget and enacted in the 2019 Finance Bill.

Firstly, the Chancellor announced an increase to the holding period for shares held by individuals. They now need to have kept these for at least 24 months rather than the previous twelve before they can claim ER on the sale. This change applies to disposals made on or after 6 April 2019.

Secondly, the Treasury introduced what has become known as the five per cent test.

This means that you have at least five per cent of both the shares in the company and the voting rights.

You must also be entitled to at least five per cent of either the profits that are available for distribution and assets on winding up the company or the disposal proceeds if the company is sold.

The person disposing of the shares must be an officer or employee of the business.

And, as always seems to be the case, meeting the criteria will not necessarily be straight forward.

“For example, where complex share structures exist, such as those used in many private companies, rights to net assets and dividends are not always simple to measure,” cautions accountancy firm BDO. “In these cases, the assessment of ER qualification may require numerous share valuations over an extended period.”

And it cautions: “In cases where there is discretion over dividends the shareholder may be treated as having no ‘entitlement’ at all and so fail the test.”

It goes on: “In addition, calculations of the entitlements of ‘equity holders’ may require certain loans or preference shares to be taken into account in calculating the economic interest of particular shareholders. This will depend on whether loans satisfy a detailed definition relating to, amongst other things, whether the terms of the loan are ‘commercial’.

“It may not be straightforward for individuals to gain certainty on this, especially where the company has institutional loan funding, from venture capitalists for instance. The calculation of entitlements may, at best, be extremely complex and, at worst, give rise to unintended outcomes and a loss of relief.”

The deadline for obtaining ER is the first anniversary of the 31st January following the tax year in which the disposal took place.

So, for the 2018/19 tax year end, the cut-off would be 31st January 2021 while for 2019/20 it is 31st January 2022.

The overview is relatively easy to understand. However for the all-important detail it is best to consult your adviser.