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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

Don’t take Entrepreneurs Relief for granted

The sale of shares in an unquoted trading company will generally give rise to a capital gain which may qualify for entrepreneurs relief, that is a capital gains tax rate of 10% on the first £10 million of gain rather than the normal 20% rate of capital gains tax.

It is necessary for three main conditions to be met:

• The company must not be carrying on activities, other than trading activities to a substantial extent.
• The vendor must have been an officer or employee of the company throughout the 12 months to the date of sale.
• The vendor must have owned at least 5% of the ordinary share capital and controlled at least 5% of the voting rights throughout the 12 months to date of sale.

In practice, each of these can cause problems.

Many companies have traded profitably and have amassed sums of cash which they have either retained in a bank account, or invested in other areas such as rental properties or shares quoted on the stock market. Generally cash sitting in a bank account will not affect the trading status of a company but substantial property or stock market investments could jeopardise entrepreneurs relief. It may be possible to restructure the company in advance of a possible sale in order that the qualifying conditions are met throughout the 12 months to the date of sale.

Sometimes shares in a company are owned by spouses but only one of them is a director or employee. All is not necessarily lost and, depending upon the level of the gain, the non-working spouse can perhaps transfer their shares to the working spouse so that entrepreneurs relief is available on the total gain.

Where shares are more widely held, there are many circumstances where individuals hold just under 5% of the ordinary shares or hold a class of shares with restricted voting rights thereby denying the availability of entrepreneurs relief.

It is worth carrying out a review of all three of the major criteria noted above, well in advance of a possible sale as not all purchasers are willing to wait for a year until the vendor gets the business sorted out.