Entrepreneurs’ relief is the goal for most business owners. It’s hard to beat a 10% tax rate! Achieving entrepreneurs’ relief seemed deceptively simple before the shock announcements in the 2018 budget. If you had been a director or employee with more than 5% of the shares for 12 months, you were home and dry – right? Sadly, even back in the good old days, the answer was “it depends”.
Some of the main risk areas for an unexpected loss of entrepreneurs’ relief, so paying 20% tax rather than 10% were (and still are), forgetting to check the nominal value of the shares, deferred consideration and earn-outs.
However, there were (and still are) also real nasties that can give an income tax liability on a share sale at rates up to 45% plus NIC, rather than 10%. Particular red flags are selling only a minority shareholding, partial “cash outs” and skewed sale proceeds.
We have years of experience in spotting the pitfalls and planning around them, achieving the commercial objectives whilst saving considerable amounts of tax. Recent examples are:
- changing the wording of the earn out in the legal documents to deliver an identical economic result but saving 10% tax
- restructuring a minority shareholder exit to deliver full proceeds at 10% tax instead of a significant chunk taxed at income tax rates
- agreeing partial shareholder cash outs with HMRC, with all proceeds at 10% tax, rather than HMRC taxing the cash at dividend rates
The Chancellor gave us extra things to worry about in the 2018 budget. The simple change announced was an increase to a two year holding period for sales after 5 April 2019. The complex change, which came in with immediate effect, was the addition of new underlying ownership tests.
The intention may have been to target planning where shares with economic rights below 5% were given 5% of votes just to qualify for relief. However, the draft legislation is horribly complicated and goes much further creating uncertainty for any but “plain vanilla” shares.
It seems that entrepreneurs’ relief is narrowing and may be further limited in future, whichever party is in government. It is crucial to get expert advice to check if your shares still qualify for relief.