10% tax on sale… double down with Investor Relief

Investor Relief was brought in to extend the advantages of Entrepreneurs Relief to investors in qualifying companies…

…and there’s a wrinkle on the rules that means an investor could also end up getting Entrepreneurs Relief too…

That’s a 10% tax rate on up to £40m of gains !

First the basics of Investor Relief

10% CGT rate on disposal of qualifying assets

£10m lifetime limit

3 year holding period required to qualify

Only available to newly issued shares fully paid for, issued after 17 March 2016 (so this is the very first year any claim under this relief could be made)

What makes an Investor?

An ‘investor’ can’t be an employee or director of the company whilst owning the shares…

… but this rule can be relaxed somewhat for unremunerated directors or someone who becomes an employee in the future…

Two lots of relief?

… someone who is an unpaid director or shareholder could get both ER and IR … which would give them the chance to pay 10% CGT on £20m of lifetime capital gains (or £40m if you include their spouse / civil partners)

Could you or yours qualify as investor in your own company?

Afraid not … the connected persons tests stops it extending to you and yours…

Unless ??? it may be possible to create a trust for your children without you as trustee and the trust could become an investor in your company

Connected Persons For IR

Stray thought

Although IR mimics and extends ER it actually has lots of similarities with EIS… could it be the replacement for EIS when EIS gets sun-setted in April 2025?

 

 

Pay no tax when you sell your company… EOT

Most owners get Entrepreneurs Relief and so only pay 10% on the Capital Gain when they sell their business…  many are not aware there’s a 0% tax option…
Transfer controlling interest to an Employee Ownership Trust (i.e. sell the business to the employees) and you pay no CGT (and no Income Tax and no IHT) on the gains…
And the employees get tax benefits as well…
What’s not to like?

Why sell to an EOT?

  • You get to sell at full market value… to people you know… very quickly… and cheaply… and without the normal hassles of selling a company
  • And there are NO capital gains, income or inheritance tax liabilities …

Do all existing shareholders have to sell all of their shares… ? … no

Can existing directors (you?) stay on and get paid…? … yes

So how’d’s’t work

  1. EOT established
  2. The shareholders sell their shares (at least 51% of the company) to the EOT
  3. This creates a debt owed by the EOT to the shareholders
  4. Trading profits in future years will be used by the EOT to repay the debt to the original shareholders

Qualifying conditions… roughly

  1. The company must be a trading company (or the principal company of a trading group)
  2. The trustees of the EOT must spread the shares to eligible employees on the “same terms”… (and in general Trust property should be used for benefit of all eligible employees)… but…
  3. The trustees may distinguish between employees on the basis of remuneration, length of service and hours worked
  4. The trustees must hold, on an ongoing basis, at least a 51% controlling interest in the company
  5. The number of continuing shareholders who are directors or employees (and any person connected to them) must not exceed 40% of the total number of employees of the company or group

Fancy it?… here’s a great article from BDO   and a Tax Insider article