Entrepreneurs’ Relief: Do you qualify?

 

In June this year, Chancellor George Osborne announced that Entrepreneurs’ Relief, which allows entrepreneurs to pay CGT at ten per cent on the first £2m of their profits on selling their business, will now be applied to the first £5m of lifetime gains.

However, all payers of higher rate income tax, including entrepreneurs, will now pay CGT at 28 per cent rather than 18 per cent. The lower rate of 18 per cent will remain for basic rate taxpayers.

Entrepreneurs’ Relief will be available in respect of:

* Gains made on the disposal of all or part of a business
* Gains made on disposals of assets following the cessation of a business
* Gains made by certain individuals who were involved in running the business

Unlike partners, who face no minimum requirement for their involvement, shareholders must work for the company and have a significant equity stake. The shareholder must be an employee or officer of the company, although no particular level of involvement is required.  Therefore, non-executive directors and part-time workers can qualify. The shareholder must own at least five per cent of the ordinary shares of the company and carry at least five per cent of the voting rights. If they do, then gains on other shares or securities are eligible for Entrepreneurs’ Relief.

While there is no minimum age requirement for Entrepreneurs’ Relief, the business interests must be owned for at least 12 months before the disposal, and the involvement in the company must have been for at least the same period.

Although the June Budget considerably increased the amount of ER available to an individual, it did not water down the qualifying conditions, which are seen by many as a disincentive to invest in family businesses.

While representations have been made to the government to relax the rules, certain groups and individuals are exempt from Entrepreneurs’ Relief. For example, passive investors in private trading companies and many members of employee share-ownership schemes will not qualify. They are given no CGT incentive to invest. 

You can get round this by making sure your business is structured in the correct way (note the qualifying conditions relating to unlisted trading companies). But be warned: the involvement and ownership conditions must be satisfied for at least a year before the sale.

Simon Brown is a partner in the private client department of Thomson Snell & Passmore solicitors. Contact him at simon.brown@ts-p.co.uk

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