Tax Efficient Digest – 2nd Feb 2017
In the case of entrepreneurs selling shares in a company, which they have acquired over time, and in some cases, close to the current sales date…will all of the shares qualify for Entrepreneurs’ Relief (ER)?
The basics on Entrepreneurs’ Relief on share disposal
Entrepreneurs’ Relief applies to a capital gain made from the sale (or transfer) of a business – the tax rate is reduced from the usual maximum of 20% (higher rate tax payer) to just 10%. There are several conditions that must be met for at least one year prior to selling your shares:
- You’re an employee or office holder of the company (or one in the same group)
- The company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group
Either of the following must also apply for at least one year before you sell your shares:
- You have at least 5% of shares and voting rights in the company – if they’re not EMI shares
- you were given the option to buy them at least one year before you’re selling them – if they’re EMI shares
One main condition is that the shares must have been owned by the individual for at least twelve months ending on the date of sale.
Mr Smith is a director and shareholder and has acquired shares over time from other shareholders: 15% in 2011, a further 25% in 2013, plus another 5% in 2014 and 20% later in 2016.
An offer was received and contracts completed to sell the business in January 2017, so shares (20%) purchased later in 2016 had not been owned by Mr Smith for one year by the time the sale occurred.
So, will the 20% holding and gain on these be subject to 20% CGT?
No – because the ER rules say that so long as an individual owns at least 5% of a company’s ordinary share capital for at least the twelve months ending at the date of sale, then all the shares owned at that time, whenever they were bought, qualify for ER. Subject, of course, to the other conditions referred to above being met. So, owing to Mr Smith’s earlier purchases, he has owned significantly more than 5% of the company prior to its sale in 2017.
The above case study highlights that so long as commercially viable and sensible (to the purchaser), slowing down the sale process to ensure that the threshold of at least 5% of a company is held for at least twelve months prior to sale may save significant amounts of CGT.
Where a married couple both own shares in the company being sold and one spouse owns less than 5% of the shares or fails to meet one of the other conditions for ER, and their spouse meets all the ER conditions, the spouse that does not qualify can transfer their shares to the other before the sale. Thus, the combined shareholding will qualify for ER on sale rather than just part of it potentially resulting in a significant CGT saving.
Christian Elmes, Partner
Christian Elmes trained at PwC and qualified as a chartered accountant in 1999, before moving to Morgan Stanley (2000-2002) as Associate in the Investment Banking Division (IBD).
He was appointed Director of Finance, Teather & Greenwood Investment Management in 2002 and moved with the Tax Efficient Solutions team to Smith & Williamson in 2004, becoming Deputy head of the department. He left to co-found Enterprise in 2011.
Over the last ten years, Christian has been responsible for developing a number of tax efficient products, particularly Enterprise Investment Schemes (EIS). He is able to lead on tax efficient product development from inception through to completion, because of his financial and tax background and commercial experience.
Christian is competent across a broad range of sectors including, leisure and hospitality, media, property and renewable energy.
Christian is a non-executive board member to a number of leisure and hospitality companies, Casper & Cole Ltd, Wright & Bell Ltd, Ruth & Robinson Ltd, Camm & Hooper Ltd and Darwin & Wallace Ltd.