Entrepreneurs’ Relief (ER) has been around for many years. However, it appears that HMRC is now taking a more active interest in ER claims and the government has recently amended some of the rules.
Here we consider the main rules in respect of individual shareholders in limited companies.
What are the basic conditions? Entrepreneurs’ relief applies to gains on disposals of shares (and securities) in a trading company (or the holding company of a trading group) provided that the individual making the disposal:
• has been an officer or employee of the company (or of a company in the same group of companies throughout the year leading up to the disposal of the shares);
• throughout that period owns at least 5% of the ordinary share capital of the company and that holding enables the individual to exercise at least 5% of the voting rights in that company.
It is critical that the tests are met throughout the 12 months prior to the date of disposal. What happened before this is not relevant. The term ‘officer of the company’ is not defined, so being an unpaid company secretary would, for example, meet the definition.
The same issue applies to employment in that the term is not defined – being paid to work 2 hours per week would be good enough. However, this is an area HMRC are interested in.
In a recent case, a husband and wife sold their shares. They both met the 5% test but the wife had been given a P45 prior to the sale at the insistence of the buyer. HMRC argued that she could not be an employee. Due to the specific circumstances of the case the Tribunal did not agree with HMRC but the case illustrates how critical the two tests are.
Make sure basic conditions are in place A simple question now needs to be asked in the case of every family company: ‘If there was a sale of the company today – what would be the maximum ER which would be available?’ The ideal answer should be £10 million multiplied by the number of shareholders.
If that answer is not the case then the question to consider is what steps need to be taken to make sure that it will apply bearing in mind that there is a minimum qualifying period of 12 months which must be satisfied. Planning if basic conditions are in place Provided that an individual meets the basic requirements detailed above they can have further shares added to their holding within that final period and those shares will qualify for Entrepreneurs’ Relief.
Where shareholders are spouses or civil partners, some last minute planning can enable a better ER position to be obtained as the following example shows. Example The shares in Helpringham Breweries Ltd are owned as follows: Ted Robinson 40% John Robinson 40% Betty Robinson (wife of Ted) 10% Jane Robinson (wife of John) 10% Base cost of the shares is negligible. Ted and John are the directors of the company. Neither Betty nor Jane work in the company and are not office holders. An unexpected offer is made for the company provided a quick sale can be arranged. As things stand, Ted and John will qualify for ER on their shares because they are officers and meet the shareholding requirement. Betty and Jane do meet the shareholding requirement but because they are not officers/employees and cannot be so for a period of twelve months leading up to the sale, their disposals will not qualify.
What can be considered in a situation like this would be for Betty and Jane to transfer their shares to their husbands and for them to make the disposal. This will only be advantageous up to a value of £10 million on each husband’s disposal.
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