Tax & Accounting News

Keeping hold of Entrepreneurs’ Relief

14/08/2009

The new Entrepreneurs’ Relief (ER), which was brought in just over a year ago, is worth up to £80,000 per individual, but there are a number of steps which can be taken to preserve the relief in relation to disposals of shares in trading companies.

Two of the main differences between ER and the former taper relief on shares in an unquoted trading company are the requirement that there must be a minimum holding of 5% of the ordinary share capital and voting rights, and that the shares must be held by an individual (or a beneficiary of an interest in possession trust) who is an officer or employee of the company. An asset must also have been owned for at least a year before qualifying for ER.

Some ownership structures that were put in place for taper relief purposes may not be suitable for ER, so anyone who has not reviewed their arrangements over the last year may want to consider the following steps:

• Directors of smaller, family-run companies should always consider involving a spouse or civil partner in the ownership and management of the company, provided they are an officer or employee. Since ER is limited to gains of £1million per individual, spreading the ownership between more people would potentially mean more of any gain qualifying for ER, once the spouse or civil partner has held their shares for 12 months. If a spouse or civil partner own less that five per cent of the shares, it may also be worth increasing their qualifying holding in order to take advantage of ER.
• If two shareholdings relate to the same individual – one in the individual’s own name and one in the name of a trust in which they have an interest in possession – and if either of the holdings are less than 5%, the holdings would not qualify for ER and it may be worth increasing the size of any holding to 5%, such as transferring shares out of the trust to increase the beneficiary’s holding to 5%.
• Share options (particularly Enterprise Management Incentive options) are often exercised shortly before the sale of a company, partly because that results in a corporation tax deduction. However, owners and advisers need to ensure any such move does not dilute existing shareholdings to below 5%.
• Preference shares are treated as ordinary share capital for the purpose of the 5% minimum holding, unless they have a right to dividends at a fixed rate and have no other right to a share in the profits of a company. In those circumstances, preference or deferred shares do not count towards the total and individuals should ensure they have not unexpectedly diluted their holdings.

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