Top Tax Tips for Owner Managed Businesses – Tip 6 – Entrepreneur’s Relief

Top Tax Tips for Owner Managed Businesses

6. Entrepreneurs Relief on Sale of Shares/Business

Entrepreneur’s relief (ER) allows individuals to pay tax at 10% on the disposal of qualifying assets including shares in trading companies and represents a very important relief for business owners.

ER may be due where in the 12 months prior to the disposal the individual was an employee / officer of the company and held at least 5% of the share capital and voting rights.

An entrepreneur/shareholder may expect the 10% rate of capital gains tax but potential pitfalls are lurking:

  • Shares with restricted rights may not qualify for relief,
  • The relevant conditions must be met throughout the 12 months immediately prior to disposal,
  • The existence of preference shares in the company could complicate the 5% calculation
  • Investments and/or surplus cash could taint the trading status of the company and ER could be lost all together
  • A purchaser of the trade may prefer to buy the trade and assets of the company rather than the shares.  In such a transaction the company will be subject to tax on the sale and additional tax will be payable on extraction of the funds from the company.  Therefore the overall rate would be much higher than 10%.
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