Chartered accountancy firm, Haslers, is calling on owners and shareholders to seek advice during the sale of their business, as failing to get Entrepreneurs’ Relief could land them with a hefty bill.
Entrepreneurs’ relief (ER) reduces the rate of capital gains tax (CGT) on disposals of certain business assets such as shares in a company from 20 per cent to 10 per cent.
However, Haslers has said that a number of recent cases have shown that HM Revenue & Customs are on the lookout to challenge transactions that do not fit within the rules.
The latest of these cases was P Hunt v HMRC, in which the FTT confirmed that when deciding whether a company is a personal company for entrepreneur’s relief (ER) purposes, the nominal value of the issued shares needs to be considered.
The tribunal heard that Mr Hunt has sold his shareholding in Foviance. He argued that the business was his personal company and that he was, therefore, eligible for ER.
He held 5.94 per cent of the total number of issued shares, however, only 4.16 per cent of the nominal value of the total issued share capital belonged to him.
Under the current rules, a person must own 5 per cent of the total nominal value of a company’s share capital and therefore Mr Hunt wasn’t eligible for ER.
This decision has confirmed that the phrase ‘issued share capital’ refers to nominal values, and while that Mr Hunt fell within the purpose of the legislation, his was a marginal case that failed to satisfy the requirements for ER.
In another case, Stephen Warshaw v HMRC, the FTT allowed an appeal against £1,158,916 of CGT due after finding that cumulative compounding preference shares were ordinary shares for Entrepreneurs’ Relief.
Prior to October 2018 an individual needed to hold at least 5 per cent of a company’s ordinary share capital and voting rights for a company to be their “personal company” and for Entrepreneurs’ relief (ER) to apply on a disposal of their shares.
In the case of Mr Warshaw, he owned ordinary shares, ordinary B shares and preference shares in a UK company which he sold for cash of £6,665,332 in 2013.
His total shareholding represented 5.77 per cent of the company. Excluding the preference shares it represented 3.5 per cent.
The FTT allowed the appeal, but Haslers have said that is another case that highlights the importance of checking share arrangements prior to a sale to ensure accessibility to ER.
Paul Reynolds, Tax Partner at Haslers Chartered Accountants, said: “As these cases illustrates, the rules around ER are extremely complex and there is a very real danger that shareholders and directors could miss out on the 10 per cent of CGT tax relief on offer via the scheme if they misunderstand the rules.
“In matters as significant as the sale of a business or major shareholding it really is imperative that individuals seek out specialist advice, ideally from a tax adviser who has experience of dealing with claims for ER.
“Failing to get this right is imperative as it could result in a tax bill that is twice as large and may make the sale uneconomical for some people.”
Paul added that changes in the Finance Act 2019 muddied the water further in this area after making it a requirement for shareholders to now hold either an entitlement to at least 5 per cent of distributable profits and assets on a winding up, or to at least 5 per cent of proceeds on a sale of the share capital.