Top Tax Tips for Owner Managed Businesses
7. Ownership Structure of Business Property
The ownership structure of a property can have a major impact on the overall tax charge.
Where properties are expected to be sold for a significant gain, it can often be beneficial to retain personal ownership (or operate through a limited liability partnership) as the tax cost of extraction of capital gain from a company can be prohibitive.
Where property is held in the taxpayer’s personal name, the taxpayer may wish to charge rent in order to extract funds from the company.  However, entrepreneur’s relief may not be available to secure the 10% rate of capital gains tax on a future sale of the property if the company pays rent to the taxpayer for the use of the property.
Pure investment property held for the long term may be better through a personal company.
It is sensible not to hold business property in a trading company.  If the trading company gets into financial trouble then the creditors can access the property.
There are partnership structures available for more significant portfolios that can provide hybrid tax arrangements to cater better for capital growth and rental profits.
Another option is the use of a personal pension scheme.  The pension can charge a rent to the trading company and it will not pay tax on the rents received.  However, the entrepreneur must way this very tax efficient mid to short term arrangement with the tax costs of extracting the property’s value from the pension scheme in retirement.

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%.

Entrepreneurs’ relief is available to reduce the rate of capital gains tax to 10% on the sale of “qualifying business assets” and is therefore an important relief for many business owners.
In order to qualify for Entrepreneurs’ relief on a disposal of shares in a trading company, in the 12 months prior to the disposal the shareholder must:

  1. hold at least of 5% of the company’s ordinary share capital and voting rights, and
  2. be an employee/director of the company

In terms of the first condition, ordinary share capital is defined as all share capital excluding fixed rate preference shares.   Therefore it is considered that preference shares that are not fixed rate must be included in the total share capital when calculating a shareholder’s percentage of share capital.
It is important to consider the existence of preference shares which could dilute a shareholding below the 5% threshold.
Where a company is considering issuing preference shares, care should be taken to ensure that the conditions for entrepreneurs’ relief are not inadvertently breached.
Contact Eaves & Co on 0113 2384030 for an initial no-obligation discussion.

Following the change to the CGT rate in June 2010, the rules for claiming Entrepreneurs’ Relief (ER) were changed so that relief is now given as a 10% tax rate, rather than the previous subtly different mechanism of reducing the gain but applying the normal rate of CGT.

In certain circumstances it may be possible to achieve an effective tax rate of 5.6% on cashing the loan notes or to receive additional ER where the lifetime limit was previously breached (but there is now some available due to the increase of lifetime gains to £10million).

If you or your clients have QCBs issued between April 2008 and June 2010, please get in contact with Eaves and Co Specialist Tax Advisors, Leeds and Southport to see if we can help.

 

Eaves & Co, Specialist Tax Advisors are excited to  have joined the Sharemark Advisers Network.
Sharemark is an alternative trading platform that offers innovative and flexible trading mechanisms to companies, their investors and employees. 
Eaves & Co, Specialist Tax Advisors are experienced in providing both tax and share valuation advice to SME’s and their owners.  We believe that our tax and share valuation background will allow us to advise both new and existing Sharemark clients on a range of tax matters including; company reorganisations, employee share schemes, management buyouts, entrepreneur’s relief and other taxation aspects of share sales.
 For more information on Sharemark, please see their website http://www.sharemark.com/

 

The recent changes in rules on Capital Gains Tax and Entrepreneurs’ Relief mean that it is more important than ever.  With the main rate of CGT now 28% and the rate on assets qualifying for ER remaining at 10%, the benefit of attaining ER is increased to 18% from the previous 8%.  Coupled with the lifetime limit increase to £10m, the overall lifetime value of ER is a maximum of £1,800,000; a significant increase on its initial value of £80,000.
It is therefore more important than ever to fully consider the availability of ER on transactions and ensure that all the conditions are met.