With the budget creeping up on us fast, it is important that you keep informed with the changes to Entrepreneurs’ Relief (EP) so that you know where you stand when it comes to selling your business. When you decide to sell your business or shares you own in a business, it is a big decision and there are many considerations to be made.
The current law
The current law allows for a seller of shares to qualify for EP if the following criteria are met: the shares must have been held for at least two years, the company must be a trading company and the shares being sold must account for at least five percent of the share capital of the company. If all of these criteria are met, the tax payable on the proceeds of the sale will be reduced from the flat rate of twenty percent, to a much smaller ten percent. This relief can be used over a lifetime, as many times as necessary, up to a maximum value of £10 million.
With this being the case, business is promoted and the number of companies within the UK has drastically increased since EP was introduced. The relief has been very important for owners of smaller companies who have later been able to sell on their businesses and retain a large percentage of the profit. However, it also allows for very big companies to get even bigger, as they are able to benefit from this relief. Although this can generally be argued to be a beneficial relief all around, there have been numerous complaints regarding the loopholes that are created because of it.
For example, the primary criticism of EP is that it can encourage individuals to set up their own private limited company, pay themselves through it and therefore reduce their exposure to taxation on their earnings. By providing a salary through dividends, lower taxes are in place and then when the company is eventually dissolved, ER will be applied to any capital remaining in the company. In the eyes of the government, this is a concerning loophole as business owners are being asked to pay less tax than those who work for them. For that reason, this may be reduced, removed or amended otherwise in this year’s budget.
How will it impact you?
So, how will you be affected if you intend to sell your business after the budget has been implemented?
This could mean that the capital gains tax bill you are liable for, on the proceeds of the sale, is much larger than it would have been in the years of ER. The overall process of the sale will probably not be affected but there might be some aspects that would be best changed in order to provide for the most tax efficient process. This is all speculative at this time, but when the budget hits, we will be here to help and to guide you through your business sale.
Get in touch with our corporate and commercial team to find out more and to see how we can help facilitate your business sale.