A UK tax rate on money you receive which sees you retain 90 per cent is very rare indeed.
But it is possible where you sell a business by using a tax break called Entrepreneur’s Relief (‘ER’).
And with the lifetime limit for ER being £10m, this can be a very valuable relief, saving you quite a bit of money.
This is a brief summary of the main things you need to know about ER. But as there have been some changes recently, and some unusual quirks it’s worthwhile you sitting with your own accountant and going through your position in detail.
So what do you need to doing to be entitled to this relief?
You need to be either selling the whole of a business, or part of a business (the part must be separately viable) in order to claim ER. The point is ER is not available if you’re just selling a few assets that don’t form part of a business.
The sale could be through either an asset or share sale.
How long do I have to have owned the business / shares?
You have to own the shares / assets for a minimum period as set out in the legislation, this depends on who owns what type of asset (for example the relief is available to partners in partnerships for as well as companies), but the minimum timeframes are not particularly long – typically 2 years – as the government want to encourage entrepreneurship and the recycling of money. As a consequence ER is available to a good many people who are engaged in business in one form or another, it’s a commonly available relief.
What about share sales and liquidations?
The rules that applicable for ‘share sales’ apply both when shares are sold and when the company is being put through a members’ voluntary liquidation – this is the typical scenario where I get involved as liquidator, where the directors have sold the business and assets then come to me with a pot of cash to distribute through the liquidation.
In such ‘share sales’:
- The company must have been trading or must have headed a trading group of companies for the previous two years. A mere property investment business does not qualify as a trading company, ER would not be available; and
- You must have been an employee or director of the company (the group) during that time. Note that the rules contain no minimum amount of time you have to actually spend working in the business, so for example non-executive directors qualify for ER.
- The sale / liquidation must take place within 3 years of cessation of trade.
- The company must not hold a significant level of non-trading / investment assets (eg investment properties or cash).
(If you have some potential issues as regards the trading period or non-trading / investment assets, click here, you might find this November 2019 case helpful).
How much must you own? – applies to shares only…
You must hold over 5% of the company’s ordinary shares (calculated by reference to the company’s entire share capital by nominal value) AND voting rights, and be entitled to 5%:
- Of the profits AND assets on a winding up; or
- Of sale proceeds if the company were to be sold.
Note that jointly held shares can be a problem. This is because each shareholder is treated as owning a proportionate part of the total joint shareholding. If your ‘proportionate share of the share’ is under 5%, you will not be able to claim ER. (But note the 5% rules do not apply to shares obtained through options under an EMI scheme).
Ok, so I am entitled to claim ER, how do I claim it?
You simply fill out the Capital Gains Tax section of your tax return. But you must do it relatively quickly after the tax year, eg for the tax year to 5 April 2019, you must claim it by 31 January 2021. See your accountant, he will know how to do it.
If you would like to explore how you can use a Members’ Voluntary Liquidation in conjunction with you claiming Entrepreneur’s Relief to maximise what you realise from your limited company business, give me a call.
For more information, you can go to the government’s website by clicking here.