Autumn Statement could have potential changes for Entrepreneurs Relief

The value of the 10% capital gains tax (‘CGT’) rate under Entrepreneurs’ Relief (‘ER’) to those holding shares in companies or interests in partnerships, as well as ‘associated assets’ is widely acknowledged.

Recent legislative changes have proven that in these austerity driven times, the government recognises that ER is a valuable resource for raising revenues.

Further changes are anticipated in the Autumn Statement and the impact of a withdrawal of ER on a prospective disposal could be significant.

Plan ahead

Accelerating a capital gain now could save a significant sum where a ‘material disposal’ is reasonably certain. Therefore consider bringing forward imminent disposals so they take place before 24 November.  Offering a buyer a discount to complete early gives everyone an incentive to pull out all the stops and could save the vendor tax of £180K per £1m of sale proceeds (28%-10%).

Use of trusts

If a disposal is some way off, a gain could be crystallised now by transferring the shares or asset into a Trust.  This increases the base cost of the asset to market value for CGT purposes, exposing only the subsequent increase in value to tax at 28%.  Also with capital structuring and assuming no changes are made to ER, this subsequent increase in value can also be reduced to the 10% rate to ensure the client is in no worse a position than before.

Example

Jane, a director, has owned Bonfire Trading Ltd, a trading company with negligible base cost, for many years.  She would like to retire within the next two years and has started to look for a suitable buyer.  Her shares are currently worth less than £10 million and she is nervous that changes to ER (e.g. changes to lifetime limits) will mean she is exposed to more CGT at 28% by the time she sells.

  • Jane transfers shares into trust now, potentially crystallising a capital gain, on which she can claim ER at 10%.
  • Whether she makes a holdover relief election with the Trustees will depend on what happens in the Autumn Statement and she will have 12 months to decide before CGT becomes payable in January 2017.
  • Business Property Relief will be available on the value of her shares being transferred into trust resulting in no inheritance tax.

Two years later a buyer is found and shares are sold for £11 million.

The Trustees pay CGT only on the increase in value of the shares in the two years since acquiring them.  To ensure that ER continues to be available should there be no changes in the Autumn Statement, Jane should retain 5% of the shares personally as this will mean the Trustees will also be entitled to claim ER on the growth in value.

 

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