I know that many of my regular readers will have spent a number of years in building up a business and there comes a point when you may want to stop – either to do something else or maybe just to move on to a well-earned retirement. If you’ve done well, almost certainly the disposal of your business interests will involve you in a chargeable gain for Capital Gains Tax (CGT) – or maybe you’ve decided to call it a day, but you then want to dispose of capital assets that belong to you personally but which you’ve used in the business, such as business premises.
The good news is:
- as long as it’s correctly structured, you should get Entrepreneurs’ Relief (ER) which will cut your tax rate for CGT to 10%
- you don’t have to off-load all your interest all at once, you can do it in stages
- you don’t have to retire.
ER which, as I’ve mentioned cuts your CGT very significantly, applies on any gain arising on:
1. The disposal of shares in a limited company where you have held at least 5% of the shares and 5% of the voting rights for at least one year. The company must be trading and you must be an employee or office-holder of the company. If the shares are Enterprise Management Incentive scheme shares, then you must have been given the option to buy these at least a year previously (see my other blogs on EMI share schemes)
2. Where as a sole trader you dispose of all or part of your business, provided you have held the business interest you are now selling for at least one year. This applies where a former sole trader takes in a new partner who acquires a share in the new partnership, but ER is no longer available simply because a sole trader incorporates and transfers the business to the new company – but don’t despair, there are other advantages (see my blog on what you gain by incorporation), and you will in due course get ER when you sell your shares in the limited company
3. If, as a partner, you dispose of all or any part of your share in the partnership (including changes in the partnership structure which result in changes in the individual partners’ profit-sharing ratios), as long as you have held the share disposed of for at least one year.
4. Where you, as an individual, have allowed an asset (such as premises) to be used in a business which has now ceased (or where your interest in it has ceased) and you dispose of that asset within three years of the cessation date.
Suppose you’ve decided to simply close down your business. As long as you meet the criteria, you can still get ER on any capital gain. However, be careful if you sell
off assets (including a customer base or other goodwill) whilst the business is still trading, as this may be treated as sale in the course of the business and you won’t then get ER.
If your business is a limited company you can get ER on a Members’ Voluntary Winding Up and please have a look at my forthcoming blog on this, to see how this might work for you.
And finally, if you’re disposing of your shares in a limited company either to other shareholders or to a third party – all well and good. However, many companies and their shareholders prefer to deal with the disposal by way of the company buying back its own shares. In this case, you do need to cease to be involved with the limited company (other than a nominal shareholding), in order for the money you receive to be treated as a capital gain and not a distribution of profits. Do have a look at my forthcoming blog on selling shares in a company and the two different routes.