Many business owners think they’ll automatically get Entrepreneurs’ Relief (ER) when they sell their business. Of course it’s really important to get it - it reduces the to 10% on qualifying gains up to a lifetime limit of £10 million. But it’s by no means guaranteed and there are a number of conditions which have to be met. If you get it wrong you pay 28% tax instead.
I’m not a tax adviser but it’s worth rehearsing the key rules and pitfalls.
You must have owned your business for the 12 months leading to disposal (which can include sale, gift, incorporation, transfers to a trust and cessation). Most business owners will have owned the company for that period – but we quite often find that some shareholders have more recently acquired their shares. You also have to hold at least 5% of the equity – it’s surprising how many 4.9% shareholders there are out there.
Trading businesses only
Only trading businesses qualify. Investment assets are not eligible and so a general property investment business does not qualify whether the property is commercial or residential. To confuse matters some property based businesses such as a hotels or caravan sites might qualify.
There are complicated rules to be followed where an asset has been partly used for the trade, or where an asset held outside the business has been used in the trade.
What about a part disposal?
Good question! Again more complex provisions to cover whether or not a part disposal qualifies. This complexity extends to situations where part of the business is disposed of in a winding up.
Making sure that you get ER can be a tricky business. And it’s probably worth making it part of your exit strategy planning. No point in grooming the company for sale, then paying too much tax.