Is selling your company part of your big picture?

Is selling your company part of your big picture?

Changes to Entrepreneurs’ Relief (ER) may double the capital gains tax payable on a disposal of your shares. If you are a business owner or own shares in a private trading company, you could be affected by these changes to the qualifying conditions for ER.

What has changed?

Two important changes have been introduced to the ER shareholding conditions:

  • 5% test – in addition to the existing requirement that an individual must hold 5% of the ordinary share capital and voting rights, they must also be beneficially entitled to either:
    1. 5% assets on winding up and 5% distributable profits, or
    2. in the event of a disposal of the whole of the ordinary share capital of the company, beneficial entitlement to at least 5% of the proceeds.

This applies to disposals made after 28 October 2018.

  • Holding period - individuals will now need to hold the shares for at least 24 months, previously 12 months, to qualify for ER on disposal – this applies to disposals made on or after 6 April 2019.

In addition, HMRC’s guidance on what constitutes ‘ordinary share capital’ has changed.

What does this mean?

The changes may mean that shareholders who met the conditions for ER no longer qualify. The additional 5% test also creates further uncertainty and complexity.

Individuals may therefore be taxed at a 20% capital gains tax rate on disposal, of 10% if qualifying for ER, reducing the net amount you would receive on a sale.

A review will be especially important if your company has more than one class of shares.

What next?

We will be pleased review whether you qualify for ER with the changes to the shareholding conditions. If you are considering selling your company shares at any time in the future, please contact your team at Creaseys for further advice.

If you are contemplating exiting your business in the future, do you know how much your business is worth?

Did you see our article on how companies are typically valued and how we can help individuals selling their business? Click here for more information.

We will continue to keep you updated on any developments, however if you have any concerns in the meantime, please call your usual Creaseys contact on 01892 546 546.