When it comes to exiting your agency, whether that’s a short term or long term goal – you need to be aware of the tax reliefs that are available to make this process as efficient as possible.
Entrepreneurs’ relief has been around for a while, however recently certain things have changed.
So, after the 2019-20 budget, I’ve broken down everything that you need to know to be up to date with how the budget has affected the relief.
Nature of the relief
Entrepreneurs’ relief reduces the rate of capital gains tax on disposals of qualifying assets to 10%. This is subject to a lifetime limit of £10 million. Spouses and civil partners have their own limit.
The relief is available where there is:
- Material disposal of business assets;
- Disposal associated with material disposal
- Disposal of trust business assets.
Availability of entrepreneurs’ relief is contingent on the qualifying conditions being met. The qualifying conditions depend on the type of disposal.
Shares in a personal company
Entrepreneurs’ relief is available for disposals of shares or securities in a personal company. To qualify, throughout the ‘qualifying period’ the company must be a personal company and either a trading company or the holding company of a trading group. The taxpayer must either be an officer or an employee of that company or of one or more members of the trading group.
The definition of a ‘personal company’ changed from 29 October 2018 (Budget day). Prior to that date, a personal company was one in which the individual held at least 5% of the ordinary share capital and that holding gave the holder at least 5% of the voting rights in the company.
From 29 October 2018 two further conditions must be met. The holding must also provide entitlement to at least 5% of the company’s distributable profits and 5% of the assets available for distribution to equity holders in a winding up.
Entrepreneurs’ relief is only available if the conditions are met throughout the ‘qualifying period’. This is currently set at one year. However, it was announced in the Budget that the qualifying period will be doubled to two years from 6 April 2019 (except in relation to disposals where the business ceased prior to 29 October 2018).
Securing the relief
The timing of the disposal is important in securing the relief. If the disposal is one of the shares in a personal company, and the new definition is not met, the qualifying period clock cannot start to run until the date when all conditions are met. To secure relief, the shares should not be disposed of until at least two years from the date on all of the conditions are first met.
Where the conditions have already been met for one year but will not have been met for two years by 6 April 2019, it may be preferable to dispose of the shares prior to 6 April 2019 to secure the relief. Alternatively, if the disposal is to take place after that date, it will make sense to wait until conditions have been met for two years in order to benefit from the relief.
The Next Steps
Unsure whether the structure of your business attracts entrepreneurs’ relief or if you’re considering share options and not too sure what’s required? Book your discovery call here and find out how we can help you along the process.