There has been much discussion in the media of last month’s Budget, but business owners have much to be grateful for. Not only will many benefit from lower business rates but also some of the reforms pundits feared did not come to pass.
Entrepreneurs’ relief, in particular, was seen as a potential target by many analysts for a restriction in scope at the least, but has survived intact; business owners will be able to continue paying reduced rates of Capital Gains Tax (CGT) when they sell their businesses. Still, it’s important to plan well ahead for such disposals – fall foul of the small print and you may not get the generous tax relief you expect.
Entrepreneurs’ relief was introduced eight years ago to encourage more people to start and develop businesses: it is designed to allow people who successfully build up companies, and then sell them, to keep more of the value they’ve created. Under the normal CGT rules, any profits you make above a set threshold when selling an asset - £11,100 in the 2015-16 tax year – are taxable at either 18 per cent or 28 per cent, depending on whether you’re a basic-rate or higher -rate taxpayer (this reduces to 10% (basic rate) or 20% (higher rate) for disposals of assets after 5 April 2016, providing the assets are neither residential property or carried interest)). Entrepreneurs’ relief, however, reduces that rate to just 10% on profits of up to £10m, though serial entrepreneurs may want to take note that this is a lifetime allowance.
The relief is available when you sell all or part of your business as a sole trader or business partner, or when you sell shares in a company where you own at least 5 per cent of the ordinary shares and voting rights. In other words, it may be available whether you’ve set your business up as a limited company, chosen to operate as a sole trader, or are in a partnership.
So far, so good, but while entrepreneurs’ relief made it through the Budget untouched, HM Revenue & Customs has been scrutinising claims for the benefit ever more closely in recent times. Unwary business owners may find themselves caught out.
The 5% rule is one trap, but there are others. For example, you must be an employee or office holder of the company if you’re selling shares and want to claim entrepreneurs’ relief.
It’s also important to know that the relief is only available to companies whose main business activities are trading, and do not include to a substantial extent non-trading activities such as holding investments. Some companies have run into trouble as a result of property assets not used within the trade– for example, one business that moved premises but kept hold of its previous property, which remained on the balance sheet, was surprised when HMRC ruled this meant its main business wasn’t trading.
There could be more such rulings as HMRC comes under pressure to show that it isn’t letting businesses get away with anything that might be perceived as tax avoidance. And while it is possible to appeal in such cases, usually with the help of a professional adviser, doing so can be stressful, time-consuming and expensive.
Better to avoid getting into trouble in the first place, even if that requires thinking many years ahead. In the case of the company keeping hold of its previous premises, for example, the decision not to sell might have been different if the question of entrepreneurs’ relief had been taken into account, but the relocation took place long before a disposal was on the cards.
This is why it can pay to take professional advice, even for business owners who are confident about running their day-to-day affairs. While there will inevitably be a cost for such support, doing without advice may prove to be a false economy if future tax benefits are lost, or expensive appeal fees incurred.
Bear in mind too that a similar system of relief for business owners applies under the inheritance tax rules. Business property relief reduces the value of a business, for tax purposes, when it is passed on as part of the owner’s estate – either as part of the will, or while they’re still alive. This can be a valuable benefit for the business owner’s heirs, but there are similar small-print traps to those that catch people out with entrepreneurs’ relief. Again, take professional advice to identify these problems before it’s too late to do anything about them.
By Ruth Chapman, Author at PwC’s My Financepartner