FOR those looking to sell their business, the most important issue – particularly in these difficult economic times – is to maximise the sale proceeds while minimising the tax payable.
Both of these require attention well before a sale is in prospect and from a tax perspective the position requires continual monitoring.
The most valuable capital gains tax relief available is Entrepreneurs’ Relief, which replaced Business Asset Taper Relief for disposal after April 5, 2008.
Under this new relief, the first £1m of qualifying gains will be taxed at an effective rate of 10% with gains in excess of £1m being taxed at a standard rate which is currently 18%. Although this could increase in the near future given other planned tax rate rises.
In the vast majority of cases, most saleable businesses are carried on via a limited company.
Entrepreneurs’ relief will be available on the sale of the shares in an individual’s personal company, if – throughout a period of 12 months prior to the disposal – the company carried on a qualifying trade and the individual owned at least 5% of the ordinary share capital and voting rights and they were an employee of the company.
Relief will also be available if a company has ceased trading within a period of three years prior to its sale, as long as the above conditions were met in a period of 12 months prior to cessation.
Entrepreneurs’ relief is also available to sole traders and individuals carrying on a business in partnership where they make a material disposal of business assets throughout one year leading up to the date of the disposal.
A material disposal is regarded as the whole or clearly identifiable part of a business.
Relief may also be extended to gains on the sale of assets owned by an individual which are used in their personal company’s business or in their partnership business.
This may apply where the individual personally owns the premises from which the trade is carried on.
For relief to be given on such ‘associated’ disposals, the sale would need to be as part of the process of withdrawal of the individual from their company or partnership and the assets disposed of used in their business throughout a period of 12 months ending with either the date of the material disposal mentioned above or the cessation of the partnership or company.
Entrepreneurs Relief is restricted on associated disposals where for instance the asset has only been used in the business for part of the period of ownership or for the period after April 5, 2008, the individual received rent for the use of the asset by the business.