16/02/2015

By Mike Hayes, Tax Partner, Kingston Smith LLP

Most business owners will be aware that entrepreneurs’ relief is a generous capital gains tax relief available on the disposal of your business or interest in your business, where certain conditions are satisfied, which means you only pay tax at 10% rather than 28%. It is, therefore, worth ensuring that the conditions to qualify are, or will be, met; because not doing so could end up costing you more than you anticipate.

Recent changes announced in the Autumn Statement have tightened the scope of disposals that are eligible for entrepreneurs’ relief (ER).

Sole traders and partnerships incorporating their business into a limited company or LLP on or after 4 December 2014 will now, in most cases, not be eligible to claim ER on the gain that would occur on the transfer of the business. A capital gains tax liability at 28% is likely to be suffered unless the transfer is structured so that incorporation relief applies; this would defer the gain until a future disposal of the shares in the limited company.

Business owners who are intending to incorporate their business, believing they can benefit from ER and extract surplus cash while only paying 10% capital gains tax, should obtain specialist advice. They may want to reconsider how the incorporation is structured to minimise their tax liability, since ER is now unlikely to be available.

Losing your entitlement to claim ER is easier than most people would think. Over the next four weeks, this series of articles will provide tips on four key areas that business owners often overlook or misunderstand, which can lead to ER not being available.

These will include:

o Qualifying conditions — more than just owning 5%;
o Incorrect ownership in arrangements involving trusts;
o How not to lose entrepreneurs’ relief on associated disposals;
o How earn outs could earn you out of paying capital gains tax at only10%.

Next time: Entrepreneurs’ Relief and Qualifying Conditions — There’s More to it Than Just Owning 5%.