Chris Williams explains how a little advance thought and planning can improve the benefit of this valuable capital gains tax relief.
For some, the individual lifetime allowance for entrepreneurs’ relief purposes (i.e. £10 million) that allows sole trader, partner or shareholder to reduce the rate of capital gains tax (CGT) to 10% on all qualifying gains in their lifetime is enough. But there’s often the chance of starting another business and making further gains on selling the earlier one.
The other time when you may need to think about doubling up the limit is when you need to plan for gains over £10 million. One limiting factor is the number of people you want to share with, as up to 20 people can each own 5% of a company’s shares. However, in practice few will want to let more than 49% of a company’s shares out of their ownership, so as not to lose control.
Don’t forget about partnerships
Gains of the size that require this sort of ‘long division’ are the rare happy exceptions, but should the need to split gains in many directions arise, a partnership may be a better business structure because there is no 5% minimum ‘share’ requirement, nor even any requirement to work in the partnership.
Don’t be frozen out by an ‘Arctic’ arrangement
Many businesses rely on one sole or main earner, but are constituted as a company in which the main person’s ‘other half’ has shares which pay them an income in the form of dividends. Provided the structure is right these ‘Arctic Systems’ type arrangements are very income tax efficient, but they don’t automatically work for entrepreneurs’ relief. Most people are familiar with the need for the shareholder to own 5% of the company’s ordinary voting shares, but may overlook the other conditions.
The other shareholder must also be an employee or office-holder. An office holder means director or company secretary, but that sort of formality isn’t necessary. There is no minimum work requirement to the employment condition, so it is possible to have only a very modest job and still qualify. Just be careful to make sure that you pay the minimum wage, even if it’s only one hour a month.
The other condition that’s sometimes overlooked is the one-year qualifying period which applies to both the 5% shareholding and the employment conditions.
Giving shares to a spouse or civil partner is effective for income tax where gifts to other family members won’t work because of the ‘settlement’ rules that make the person who sets up the arrangement liable for income tax on income that the others receive. However, those ‘settlor interested’ rules don’t apply for CGT purposes, so you can give shares to a non-married partner or children for the purpose of getting entrepreneurs’ relief for them: just remember to do so in time for them to meet all of the conditions.
Practical Tip:
If you’ve given your spouse shares to enable them to get entrepreneurs’ relief, but the chance of a company sale arises before they’ve met the qualifying conditions for a year, there may be a way out.
If you still have spare capacity in your lifetime allowance (e.g. the sale is for £10 million which would have been split 50:50 and you have never made any previous disposals qualifying for entrepreneurs’ relief) your spouse can transfer his or her shares or partnership share back to you at any time before the sale. If they do that you’ll pay all the tax, but only at 10% instead of the 28% they would have paid.
