Never assume you’ll pay 10% tax when you sell your company shares or assets used in your business.
Capital Gains Tax can be charged at 10%, 18%, 20% or 28% depending on what you are disposing of and your level of income in the tax year the sale occurs.
If your disposal qualifies for Entrepreneurs’ Relief (ER), the capital gain should be charged to tax at 10%. Under our current tax legislation, an individual is able to realise qualifying gains of up to £10 million in their lifetime and still only pay tax at 10%!
As ever, various conditions need to be met to qualify for ER. It’s best to plan ahead – if you are unexpectedly approached to sell your company shares or business assets, will your disposal qualify for ER?
ER can apply to sales or gifts of
- Your sole trade business or partnership interest
- A significant and separately identifiable part of your sole trade or partnership business
- Personally held assets used in your partnership which are sold at the time the business ceases and within the next three years
- Ordinary shares held by an officer or an employee of a trading company providing you hold at least 5% of the votes and would be entitled to 5% of the sale proceeds on the disposal of all the company’s shares (or entitled to at least 5% of the distributable profits (dividends) and net assets of the company on a winding up)
- Shares granted under The Enterprise Management Incentive Scheme (EMI)
- Business assets owned by trustees
If your company has different classes of shares, the 5% economic test will need to be carefully looked at – merely holding 5% of the ordinary shares may not be enough to obtain ER. However if your shareholding is to be diluted because new shares are being issued for cash on a commercial basis, your ER entitlement can be protected – on the assumption that all the ER tests are still satisfied at the time the shares are disposed of. If you hold preference shares and shares granted under EMI options, always seek independent professional advice on ER.
As ever, there are a myriad of conditions that need to be met for two years before the date of the disposal, by you and your business/company, for ER to qualify. It’s dangerous to assume you’ll qualify; planning ahead is paramount especially as recent changes to how ER operates has created more complications and uncertainty.
Please call Katie or Sarah for friendly help and advice on 01223 810100.