What tax do I pay when I sell my business?

Question.

I own a shareholding in a company and my new year’s resolution is to sell my shares and retire. At a Christmas party I was told that the maximum tax that I will pay is 10%. Is this correct?

Answer.

The answer is possibly. The danger of Christmas party advice is that it is normally dispensed in isolation with little knowledge of the facts of your particular case and under the influence of alcohol!

Entrepreneurs Relief (ER) is one of the most generous and important tax reliefs in the UK and it is designed to benefit taxpayers whose businesses are brought to an end or sold. It operates by reducing the rate of capital gains tax payable on qualifying disposals to 10%.

There is a lifetime limit of gains to which the relief can apply – currently £10 million of gains.

There are three types of qualifying business disposals and the category which will apply to your disposal is shares in or securities of a personal company which is either a trading company or the holding company of a trading group and the individual was an officer or employee of that company or another company in the same group.

For you to have a successful claim for entrepreneur’s relief you must satisfy all three of the above criteria at the time of the disposal and for a period of one year prior to the disposal.

1. The term ‘personal company’ is defined as a company in which the individual not only holds at least 5% of the ordinary share capital but also is able to exercise at least 5% of the voting power by virtue of that shareholding.

2. The shares must be in a trading company, or the holding company of a trading group – a trading company is a company that carries on trading activities and does not carry on non-trading activities to a substantial extent, and a trading group is a group of companies where:

• One or more of the group’s members carry on trading activities
• The activities of the group, taken together, do not include to a substantial extent non-trading activities.

A group of companies means a company that has one or more 51% subsidiaries, together with those subsidiaries.

HMRC regards substantial as meaning more than 20%, to be measured according to some or all of the following indicators:

• Income from trading and non-trading activities
• The asset base of the company
• Expenses incurred or time spent by officers and employees in undertaking the activities
• The company’s history (for example, in the case of a seasonal trade, receipts may have to be looked at over a longer time scale)
• Balance of indicators (some indicators may point in one direction and some in another, so the relevance of each in the individual case being considered must be weighed up and judged)

3. Whether a person is an employee (employed under a contract of service) or office holder is a question of fact. There is no statutory test to determine employment status for tax purposes.

All of the three criteria must be satisfied for a minimum of one year prior to the disposal.

The entrepreneur’s relief ownership condition attaches to the owner rather than the asset being disposed of and as long as you have owned 5% for more than one year any additional shares acquired in the 12 months before sale will also be covered by ER.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.