Entrepreneurs’ Relief reduces the rate of CGT to 10% on the first £10 million of gains on the disposal of qualifying business assets. This would include sole traders disposing of their business and partners disposing of their interest in a partnership carrying on a business. With many businesses operating as limited companies these days it is important to appreciate that not all shareholdings qualify for this generous relief.
Shareholdings qualify for Entrepreneurs’ Relief provided the company is a trading company or the holding company of a trading group. There are additional conditions that the shareholder is an officer or employee of the company and holds 5% or more of the company’s ordinary share capital and votes. All of these conditions must be satisfied throughout the twelve months up to the date of disposal.
A couple of recent tax tribunal cases have considered the 5% test and the HMRC view is that most shares except for certain preference shares need to be considered. Always contact us first if you are considering issuing additional shares in your company as it may have a detrimental effect on other shareholders’ entitlement to CGT Entrepreneurs’ Relief.
Shareholders must also be officers or employees
In order to qualify for CGT entrepreneurs’ relief on the disposal of shares, the shareholder must have been an officer or employee of the trading company or group throughout the twelve months up to the date of disposal. Although there is no minimum number of hours, it is important that there is evidence that this condition is satisfied, so for example the employee/ director should not resign before the disposal of shares takes place.
HMRC are known to request such evidence and recent tax tribunal cases have resulted in Entrepreneurs’ Relief being denied.