In the age of instantly available information through the internet, many modern-day entrepreneurs have an understanding of key tax rules, particularly those relating to the disposal of shares in their personal company.
The so-called Entrepreneurs’ Relief (“ER”) provides a reduced rate of Capital Gains Tax (“CGT”) of just 10% for disposals of shares in a trading company.
On the face of it, this relief can appear simple. Business owners can therefore be forgiven for assuming they will be entitled to Entrepreneurs' Relief when they decide to sell their business. However, the rules are more complex than they first appear, and business owners should not assume that they will qualify.
A recent tribunal case highlighted the need for taxpayers to seek proper advice when they dispose of shares in their company, not only to confirm that relief will apply, but also to ensure that the disposal is correctly disclosed on their self-assessment tax return (“SATR”).
In Merrie v HMRC, it was upheld that HMRC could impose significant penalties as a result of Mr Merrie failing to disclose appropriate gains on his SATR in respect of the disposal of shares in his company. He believed that Entrepreneurs' Relief was available and therefore did not seek appropriate advice, presumably due to costs and perceived simplicity. Although relief was indeed available, it appears that he misunderstood the implications of the deadline for an Entrepreneurs' Relief claim and assumed that it allowed him to defer including the gain on his SATR, and additionally he did not appreciate the implications of different types of consideration received.
The consideration received on a sale of shares can be in the form of cash, loan notes and perhaps even shares in the acquiring company. There can also be an element of contingent consideration, dependent on future events or results. These different forms of consideration have different tax implications for the seller, and in some cases the gains arising can be deferred until a later date.
However, although this sounds like a good thing, it may be better to elect to tax the gain up front in order to claim ER (for example where the subsequent disposal of shares in the acquiring company does not qualify – this issue also arose for Mr Merrie).
The CGT implications of selling your company can be complex and failure to seek proper advice can lead to unnecessary tax and, in the event of an error in an SATR, interest and penalties. Business owners should not assume that ER will apply.
Careful tax planning can ensure that valuable Entrepreneurs’ Relief is available to a business owner when they dispose of their business, ensuring they retain the maximum cash when they sell up.
We recommend that anyone considering selling their business seeks proper tax advice at the outset. This can potentially give assurance that Entrepreneurs' Relief will be available, or if it is not then it gives opportunity to consider if anything can be done in advance to qualify for it on a future sale.
If you would like to speak to one of our advisers about this, please get in touch to arrange your initial consultation.
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David Robinson
As a Tax Partner, I advise clients on all aspects of UK tax, ranging from business taxes, transactions and private client matters, helping to achieve the objectives and aspirations of businesses and their owners.
View my articlesTags: Business Taxes
