A capital gain arising on the disposal of a ‘business’ can benefit from a reduced rate of capital gains tax of 10% provided the disposal qualifies for Entrepreneurs’ Relief (ER).
There is a lifetime limit of £10 million of gains which can qualify for ER so given that the higher rate of CGT is 28% the relief is worth up to £1.8 million per individual.
For a business disposal to qualify for Entrepreneurs’ Relief it must fall into one of the following categories:
Sole trader business or partnership share
The disposal of part of a business. Note however capital gains arising on the disposal of individual assets do not normally qualify for ER.
Property letting business which complies with the rules for ‘furnished holiday lettings’
Shares in a personal company where the individual is an employee or office holder and owns at least 5% of the ordinary share capital and voting rights.
Property owned personally by a director but used in the trade of a personal trading company provided both the shares and the property are sold at the same time
Note in each of the above cases the individual must have owned the business or shares throughout the 12 months ending with the disposal.
Note that subject to meeting the normal qualifying rules, Entrepreneurs’ Relief may be claimed on any of the following events:
- The normal sale of a business or shares to a third party
- A gift of a business or sale at an undervalue to say a family member
- A company winding-up
- A company purchase of own shares
- The incorporation of a business
Practical planning tips:
Where a gift of shares is made to a spouse or civil partner, ensure that any transfer is actioned at least 12 months before a planned disposal and that the recipient owns at least 5% of the ordinary shares following the transfer. That recipient will also need to be employee or officer within the company, which includes the office of company secretary.
Where business premises are personally owned by a director but used by a personal company, it should be noted that ER will not be available where a rent is being charged.
Avoid investments building up within a trading company as this could result in a share disposal not qualifying for ER.
Do not do anything drastic concerning the sale or transfer of a business asset without first taking professional advice, particularly in terms of timing and structure.
Think well in advance about business succession within family businesses to ensure that any capital gains tax is minimised on a transfer of ownership.