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Tax changes you need to consider when selling a business

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Tax changes you need to consider when selling a business

For anyone selling a business or their company shares, Entrepreneurs’ Relief (ER) could offer a tax saving of up to GBP1 million(1). But how will the changes to the qualifying rules this year affect your planning?

Entrepreneurs’ Relief was created to encourage genuine entrepreneurial activity, which might suggest it would be available automatically on the sale of a business. However, there are various conditions that need to be satisfied to receive the relief. Tightening the rules – a step announced in the Budget speech last November – is designed to close a few loopholes in the system2.

ER offers a reduced rate of Capital Gains Tax at 10 per cent rather than 20 per cent, subject to a lifetime allowance of GBP10 million – meaning that it can be worth up to GBP1 million. ER may apply if you sell all or part of your business, or if you sell shares or securities, providing you meet certain conditions3.

Changes to qualifying time

 

If you’re selling or closing the organisation, you must be a sole trader or partner and you need to have owned the business for at least a year – a condition that remains unchanged. If you’re closing the business, you still need to dispose of any assets within three years.

From April, however, if you’re selling shares or securities, you need to have been an employee or office-holder in the company (or group) and owned at least 5 per cent of the ordinary share capital with an entitlement to 5 per cent of the voting rights of the shares, for at least two years – an increase of a year. And the company’s main activities must be in trading, rather than non-trading activities like investments4.

There are a number of implications for anyone planning around ER – not least that you need to have a very clear understanding of when the business started because of the doubling of the qualifying period.

The all-important 5 per cent

 

Aside from this headline change, there are new rules around the amount and type of shares held. As stated above, you must hold at least 5 per cent of the ordinary share capital (measured by nominal value) and have an entitlement to 5 per cent voting rights through those shares. However, you must also be entitled to 5 per cent of the winding-up assets and 5 per cent of the distributable profits. If the whole ordinary share capital of the company is being disposed of, you need to be entitled to at least 5 per cent of the proceeds5.

If your company has multiple share classes, you may also no longer qualify for ER when you dispose of those shares. If you have ‘growth’ shares, for example, where you only receive a proportion of the value over a threshold level, you may not be entitled to 5 per cent of the proceeds. If so, under the new rules, you would not qualify for the tax relief6.

If you have ‘alphabet’ shares, where the only difference between the shares is the ability to pay different dividends, you could still qualify for ER if you’re entitled to receive at least 5 per cent of the proceeds7.

Expert guidance: given that Entrepreneurs’ Relief is such a significant tax relief, it’s vital to get expert guidance on the implication of the changes. That means speaking to your tax advisor or accountant before taking any action.

Enterprise Management Incentive (EMI)

 

If your shares come from an Enterprise Management Incentive, there’s no requirement to hold 5 per cent, providing you bought them after 5 April 2013. You also need to have been given the option to buy the shares at least one year (up to 5 April 2019) or two years (after 5 April 2019) before selling them.

As the two-year qualification period runs from the date of grant as opposed to the date of exercise, it is possible to exercise the EMI options and sell the shares on the same date, which provides cash-flow and possible tax advantages. To qualify, the individual must be an employee/officer of the company throughout the two years ending with the date of the disposal of the EMI shares, and the shares must meet the requirements of the EMI Scheme8.

1HS275 Entrepreneurs' Relief (2016). Updated 6 April 2018
2Capital Gains Tax: Entrepreneurs’ Relief: minimum qualifying period extension – General description of the measure. Updated 30 October 2018
3HS275 Entrepreneurs' Relief (2016). Updated 6 April 2018
4Capital Gains Tax: Entrepreneurs’ Relief: minimum qualifying period extension. Updated 30 October 2018
5Capital Gains Tax: Entrepreneurs’ Relief: minimum qualifying period extension. Updated 30 October 2018
6Entrepreneurs’ relief change, 10 January 2019
7Entrepreneurs' Relief – The death of Alphabet shares?, 13 November 2018
8Entrepreneurs' Relief

This material is issued by HSBC UK Bank plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. It has been issued for your information purposes only.

Please note that HSBC does not provide tax or legal advice and clients should seek professional advice from their tax advisor. Any reference to tax is based on our knowledge of the current and proposed tax regime and is subject to change.

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