How To Minimize Capital Gains Tax When Selling Business
Entrepreneurs’ relief can cut the tax rate on gains from selling your company to just 10%. But how can you make the most of this generous tax rate when you sell the family business?
One of the first actions the Chancellor took when he came into power in 2010 was to hike the the capital gains tax (CGT) rate from 18% to 28%. But it wasn’t all bad news. Mr Osborne massively increased the rate of ER, which can reduce the CGT payable when you sell your business.
ER up 400%
At the start of 2010/11 ER was limited to capital gains of £1 million, but since April 2011 that figure had increased to £10 million. This raises the amount of CGT that can be saved from a maximum of £80,000 to a massive 1.8 million. But in the small print there are some tricky rules which can deny ER if certain conditions aren’t met, and typically family-owned companies are often at risk of losing out on this tax break.
ER works by reducing the rate of CGT to 10% instead of the new maximum rate of 28%. But to minimize the gain, it must result from the sale of all, or part, of your business and you must have owned it for at least twelve months. Where you run your business through a company there are two further hurdles to clear: you must own at least 5% of the ordinary controlling share capital and be an employee or officer of the company, i.e. a director or company secretary.
Trap. Where ownership of your company’s shares is spread among the family members (that includes your spouse) who either don’t work in the business, or work for it but own less than 5% of the ordinary share capital, they won’t qualify for ER when the company is sold. But in either situation there’s a possible solution.
Not employed or not enough shares
Unlike similar tax reliefs which came before ER, you don’t have to be a full-time employee or director to qualify; there’s not even a minimum number of hours you have to work, but the job must be genuine.
Tip 1. If your spouse or other family member owns 5% or more of the ordinary shares but doesn’t work for the company, you can make them an officer or employee at least twelve months prior to its sale. They’ll have to carry out some duties for which the company should pay them. Anything from archiving computer or paper records or attending board meetings as the company secretary will be fine. In other words, you can cater the work to meet the time they have available.
Tip 2. If the family member doesn’t own enough shares to qualify for ER, you could transfer some of yours to them. As long as they own 5% or more for over a year before the company is sold they’ll qualify for ER. Where you’re transferring shares to your spouse, there are no CGT consequences, but where the transfer is to another relative, there might be.