The next step

Calculation of the tax saving in the article

[Miscellaneous]

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Maximising entrepreneurs’ relief

ER boost

For the second time in less than a year Mr Osborne has made a huge hike in the amount of entrepreneurs’ relief (ER) business owners can claim against tax payable on gains made from selling their business. This is good news, but the increase in the ER limit to £10 million, which applied from April 6, is unlikely to help many company owners, as even the previous limit of £5 million was out of their league. But for one of our subscribers it turned out to be a godsend.

Profit shifting

In just a few years our subscriber had developed his web-based business idea into a successful company, but he had been too busy to think about tax planning. Then last year, on advice from his accountant, he transferred a 50% share of his company to his wife who had virtually no income of her own. This move could save around £13,000 income tax per year (see The next step). What he and his wife hadn’t expected was to receive an offer to buy the company just months later.

Tip. A gift of shares between spouses allows you to shift dividend income between you without triggering a Capital Gains Tax (CGT) bill.

CGT mismatch

Our subscriber was expecting both their CGT bills on the sale of the company to be the same, but he got a shock when his accountant estimated that hers would be £500,000 more. The amounts involved in our subscriber’s case are high because his company was being sold for £5.6 million, but the tax trap which led to the unbalanced CGT payments can apply at any level.

Trap. To qualify for ER you must hold 5% or more of the ordinary share capital for at least twelve months and be either a director or company secretary of the company, or one of the companies in the same group (see The next step). Our subscriber’s wife didn’t meet these requirements.

ER rate of tax

The good news for our subscriber is that he qualifies for ER on his 50% shareholding and so, after his annual exemption has been knocked off, his capital gain will be taxed at 10%. On the £2.8 million he’ll pay £279,000. On the other hand, his wife will be taxed at 28% giving a CGT bill of £781,000. A total CGT bill of over £1 million.

Return gift

Our subscriber’s accountant was on the ball and realised that ER could be achieved on all the shares. He advised our subscriber’s wife to give back her shares to her husband before the sale contracts were signed.

Tip. As our subscriber currently qualifies for ER, any more shares that he acquires, even a day before the sale of the company, will also qualify. It seems too good to be true but the Taxman seems happy to accept this principle. The happy ending is that the total CGT bill will now amount to around £560,000: a saving of £500,000.

For the calculation of the tax saving (TX 11.14.05A) and for the meaning of ordinary share capital (TX 11.14.05B), visit http://tax.indicator.co.uk.