06 Apr
How To Minimize Capital Gains Tax When Selling Business
Entrepreneurs’ relief can cut the capital gains tax from selling your company to just 10%. But how can you Minimize Capital Gains Tax rate when you sell the family business?
Changed Rates
One of the first actions the Chancellor took when he came into power in 2010 was to hike 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 tax of £1 million, but since April 2011 that figure had increased to £10 million. This raises the amount of capital gains tax 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.
Rules Recap
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.
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.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.