Corporate Focus - June 2010

Not so taxing news for entrepreneurs

There were a few surprises in the recent Budget – the new 28% CGT rate was probably in line with what most people expected but its immediate introduction was considered to be less likely, not least because of the administrative difficulties brought by a split tax year with two different rates of CGT.

The new entrepreneur’s relief limit will be welcome for many shareholders – an additional £3 million being taxed at a rate of 10% will save the shareholder up to £240,000 compared to the current position. This means that with medium sized companies it will be even more important than before to ensure that shareholdings are spread around family members to maximise the relief.

By way of example, an individual shareholder owning 100% of the share capital of a company worth £15 million would pay CGT under the new rules at £3.3 million. If a third of the shares were transferred to each of his spouse and adult child (and before sale all the conditions were met such as working in the business and one year’s ownership) the overall tax bill with full entrepreneur’s relief for all three of them would be £1.5 million, saving a material £1.8 million! If you haven't already done so we recommend revisiting family participation in the business albeit with the usual shareholder agreement safeguards.

Individuals who may have sold one business already and used the existing £2 million limit will be able to benefit from the additional £3 million of relief on new gains.

Shareholders with very large gains will clearly be worse off than under the old rules – the combined effect of the new version of entrepreneur’s relief and the new 28% rate mean that shareholders with gains of £7.4 million plus will now be worse off, but perhaps not as badly off as they had feared.

Some expected the qualifying conditions for entrepreneur’s relief to be widened – perhaps to include shareholders with less than 5% shareholdings and EMI option holders who, even with 5%, often do not benefit as they do not meet the 1 year holding test. You may recall that under the old taper relief rules the holding period for EMI started from the date of grant rather than exercise. The fact that this was not done means that many employee shareholders will pay CGT at 28%. In cases where the employee has not risked his own funds such as where options were granted at a low value, some might say that this is quite fair as this type of shareholder is not an entrepreneur. EMI (and other forms of share plan that can deliver capital rather than income growth) will still, of course , be attractive as particularly in companies with huge growth potential, at least the option holder is protected from tax at 50%.