Name: Aileen Scott
Company: Campbell Dallas
Aileen Scott is a partner at Campbell Dallas, Charterted Accountants. Email Aileen with your financial queries and she will answer in following issues of BWS magazine. e: firstname.lastname@example.org
Selling Business Assets
Selling Business Assets Where a capital asset (e.g. a building) is sold at a gain there are a number of reliefs which could be considered to reduce the tax payable on the gain, mainly in relation to business assets. Such reliefs are often used to defer tax to a later date rather than avoid the tax permanently. Entrepreneurs’ Relief however can significantly and permanently reduce the capital gains tax liability on qualifying disposals by virtue of a very low tax rate of 10%, compared with 28% for gains that don’t qualify.
What is Entrepreneur’s Relief?
Entrepreneur’s Relief was introduced in 2008 to replace the previous taper relief regime. The purpose of both reliefs was to provide a lower tax burden on an individual selling their business, on the basis that they had been taxed on their profits throughout the life of the business. It was also hoped that making this lower tax rate available for qualifying sales would encourage entrepreneurial activity.
Why is it Important?
This relief has become increasingly significant recently. It initially applied to the first £1 million of lifetime gains made by an individual and reduced the rate of tax paid from the main rate of 18% to 10% (therefore having a potential value of £80,000, i.e. 8% of £1 million). The lifetime limits and main Capital Gains Tax rate have both subsequently increased. The relief now applies to the first £10 million of lifetime gains made by an individual and reduces the rate of tax from 28% to 10% (therefore having a potential value of £1.8 million).
What Kind of Disposals Qualify?
Entrepreneurs’ Relief allows individuals and some trustees to claim relief on qualifying gains made on disposals that fall into the following categories:
- all or part of a business
- the assets of a business after it has stopped trading (must be disposed of within three years of cessation of the business)
- shares in the individual’s personal trading company
In the case of a company share disposal, Entrepreneurs’ Relief applies only where the claimant has been an employee or an officer of the company for a period of at least 12 months ending with the date of sale. In order to qualify as their “personal company” the individual must have owned at least 5% of the company’s ordinary shares, for at least the same qualifying period of 12 month prior to sale. When making a claim on a disposal of shares where the company’s business has ceased trading, the share disposal must take place within three years of the business ceasing.
What is the Time Limit for Claiming Entrepreneurs’ Relief?
Entrepreneurs’ Relief must be claimed by the first anniversary of the 31 January following the end of the tax year in which the gain was made. For example, if you disposed of a qualifying business asset in the 2012/13 tax year Entrepreneurs’ Relief must be claimed by 31 January 2015.
Planning Point – Two Birds One Stone
A sole trader or partnership may have a business asset that they have owned for a while and could sell for a large capital gain. Without ceasing their business the sale of the asset would not qualify as an associated disposal for Entrepreneurs’ Relief purposes and therefore be subject to full rates of capital gains tax, up to 28%, on any gain rather than the much lower 10% rate.
A possible option in this scenario might be to incorporate the sole trade or partnership business which, as well as representing a cessation of the unincorporated business, could offer additional tax advantages in any case, together with limited liability for the company. The cessation of the sole trade or partnership business would present an opportunity to sell the business asset to a third party, realise a capital gain and access the Entrepreneurs’ Relief tax rate of 10% on the capital gain.
For anyone in this type of situation and looking to minimise their capital gains tax bill it pays to take professional advice before making any disposals that could result in a large tax bill.