Business owners who are considering selling up may have had a pleasant surprise in the Budget. The increase in the limit for entrepreneur’s relief on capital gains tax (CGT), from £1 million to £2 million, should mean you can retain more of the wealth you’ve created when you come to dispose of a trading venture.

The standard CGT rate is 18 per cent but if you qualify for entrepreneur’s relief and sell your business you only have to pay CGT at 10 per cent on the chargeable assets that were used in your trade, such as property and goodwill or on the disposal of the shares in your company.
 
The higher limit effectively means that if you sell your business on or after April 6th 2010, you could save up to £160,000 against the full rate of tax” compared to £80,000 under the old limit.

This is a lifetime limit, so if you don’t use it all in one go you can roll it forward into new ventures and benefit when you realise more gains in the future.

Protect your eligibility
The important phrase above is ‘if you qualify’. This means planning well in advance of the sale to ensure that the business activities and your ownership of the business or company shares will attract the relief.

Here are some of the key factors you will need to satisfy in order to qualify:

• if a limited company, you must have owned more than five per cent of the shares for at least 12 months
• if a shareholder, you must also have been an officer or employee of the company for at least the 12 months up to the date of disposal
• if a sole trader or partnership, you must have carried on the business for at least 12 months
• less than 20 per cent of the company’s activity should be non-trading, e.g. property rental.

Charging rent for personally owned assets used by your trading company, such as property, will restrict entrepreneur’s relief available on an associated disposal of the property. However this should be balanced against the possible benefits of receiving the rental income.

The following examples demonstrate how easy it could be to slip up.

Mr X
Mr X is a 100 per cent shareholder of a trading company. He has just been offered £360k for all his shares.

A friend advised him to transfer some of his shares to Mrs X to use up her lower tax rates and annual CGT exemption. Mrs X has no income at all, so Mr X transfers half his shares to his wife just before the sale to try to minimise the tax burden.

Unfortunately, Mrs X has not held the shares for 12 months and is not an officer or employee of the company, so she will not receive entrepreneur’s relief on the gain from selling her shares.

Had Mr X kept and sold all the shares himself, the total tax would have been £34,200. By splitting the shares with Mrs X, this has risen to £46,800.

Mrs Y
Mrs Y runs a trading company which, over the years, has accumulated a significant amount of surplus cash. Rather than investing it in growth for the trade, Mrs Y decides to diversify and invest it in buy-to-let properties. 

Rental of property is a non-trading activity. If the non-trading activities of the company are deemed to exceed 20 per cent of its total activity (measured in terms of income, asset value and management time), the company may no longer be treated as a trading company. Any future disposal of the company shares may not attract entrepreneur’s relief as a result.

As with any activity relating to tax and tax planning, it is vital to use the best professional advice you can find. In the case of entrepreneur’s relief it is important to take advice before making any business decisions which could affect your company’s structure. 

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre