Early planning can mean lower tax bills on a business sale

Early planning can mean lower tax bills on a business sale

Despite more business sales, capital gains tax (CGT) planning opportunities are not being considered in enough detail or far enough in advance. So says Jon Croxford, a partner and tax planning specialist at Solihull-based private client law firm Meridian Private Client LLP.

Mr Croxford is mainly talking about ‘entrepreneurs’ relief’, which provides owner-managers of businesses with significant CGT benefits by allowing gains to be taxed at ten per cent  when their businesses are sold rather than the normal CGT rate of 28 per cent for a higher rate taxpayer.

“An individual’s savings from this tax break can be as much as £1.8m” said Mr Croxford, who adds that certain conditions have to be met for entrepreneurs’ relief to be available. 

“The business must be a trade, not an investment and difficulties arise when a business combines both elements.  This can even happen inadvertently” he said.

“For example, if a successful trading company generates cash which is surplus to trading requirements and which constitutes more than 20 per cent of the assets of the business, the relief may be lost”.

However, Mr Croxford points out that careful planning can help to secure the relief even in these circumstances.    He said: “Such surplus cash can be extracted or re-invested in trading activities. Alternatively, where there are separate trading and investment activities, it may be possible to split the existing company into separate trading and investment companies”.

He adds that the individual shareholder must, over at least a year before disposal, have met certain conditions for entrepreneurs’ relief to be available. 

“If the business is held within a company, the individual must own at least five per cent of the ordinary shares and also be an officer or employee, although not necessarily full-time” he said.  “Professional advice should always be taken well in advance of a business sale.”