Entrepreneurs' Relief – Use it or lose it

In the run up to the General Election it has become clear that Entrepreneurs’ Relief may not be around much longer, whichever party/ies are in power.  Business owners looking to sell in the short to medium term may well find themselves worse off than they expected under the current tax rules if the scope of any future reliefs is narrower than Entrepreneurs' Relief.

What can be done? 

Any transactions currently ongoing should aim for completion ASAP in order to protect Entrepreneurs' Relief.  But that’s easier said than done.

For companies not going through a sale process currently, it may be possible to lock in the Relief under current tax rates, by inserting a new holding company.   The holding company would need to be inserted for genuine commercial reasons, which could be that the company has substantial assets, or surplus cash, that the shareholders wish to ring-fence from risks in the trading company.

The new holding company would ordinarily acquire the existing company via a tax-free share for share exchange, providing there is a genuine commercial reason to do so.  However, it is possible to make an election to disapply the share for share exchange rules, and thereby trigger a CGT liability on the disposal on which the Relief could apply.  This election can be made by the 1^st anniversary of the 31 January following the end of the tax year in which the disposal takes place, giving the individuals time to consider whether it is worth making the election.

Clearance can be obtained from HMRC before the transaction completes to confirm the holding company can be inserted tax free, on the basis that there are genuine commercial reasons, which gives the taxpayer additional comfort on the whole process. 

An Example      

A business owner is contemplating selling their company, in 2-3 years’ time.  They insert a new holding company above their existing company in January 2020 to potentially protect against the loss of Entrepreneurs' Relief, and obtain clearance from HMRC to confirm this can be done tax free.  At this time, their company is worth £5m. 

In April 2020 the relief is abolished.

In January 2021, the business owner elects to tax the gain on the share for share exchange, and pays CGT at 10% (£5m at 10% = £500k). 

In December 2021 the business is sold for £5m.  Ordinarily this would be taxed at the rate applicable in December 2021 (which could be as high as 50% under a Labour government).  However, as the individual has already paid CGT on a £5m gain, no further tax is due. 

The individual has saved tax of up to £2m (being £5m x 50% less £5m x 10%).  

Should I do this?

There must be a genuine commercial reason to insert the new holding company to achieve the beneficial tax treatment.  If this is something that you intend to do anyway, it may be worth bringing forward your plans to insert a new holding company.    If the Relief is abolished, the added bonus is that you can elect to trigger a gain by the deadline, thereby ‘banking’ Entrepreneurs' Relief.  

Therefore, it is worth bringing forward if you are already considering a holding company. 

Careful planning is required, but this could lead to significant savings compared to a gain taxed at much higher rates in the future.

Our dedicated tax planning team guide clients through tax changes and help identify opportunities and strategies to organise their affairs in a tax efficient manner.  If you require any advice, then begin your journey with us today; drop us a line and let's start talking about how we can save you tax.

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