Selling a business? Be aware of possible tax changes

The Chancellor’s Budget and Autumn Statement always contain plenty of substance for writers and analysts from health to housing and the headline grabbing U-turn on tax credits.

However, the devil is in the detail and one proposed measure which may have slipped your notice in 2015 among all the numbers and percentage points is one affecting Entrepreneurs’ Relief.

If you are selling a business, an important factor will be whether or not you will qualify for the scheme, which is open to directors who own five per cent or more of a company.

It allows them to enjoy a 10 per cent tax rate on capital gains up to a lifetime limit of £10 million, which compares with the 28 per cent of tax payable without the relief.

If you have decided to sell all, or even part, of your business, the following must apply:

  • You are a sole trader or business partner;
  • You have owned the business for at least one year before the date you sell/close it;
  • You sell or dispose of your business assets within three years after selling or closing the business

Looking to sell shares? Then the following criteria must apply for at least one year before they are sold:

  • You have at least five per cent of the shares and voting rights
  • You are an employee/director of the company or one in the same group
  • The company’s main activities are in trading

George Osborne and his Treasury team are concerned that members of management teams who do not pass the five per cent “personal ownership” test are teaming up with other individuals to form a management company. This shell would own at least 10 percent of the trading company nominal share capital, allowing for the same rate of tax relief as Entrepreneurs’ Relief under the rules relating to joint ventures.

The Chancellor is keen to take steps to ensure relief was “only available to those selling genuine stakes in businesses” though tax experts have warned that closing the loophole could deter would-be investors from backing young companies.

A consultation document on company dividends has been published by HMRC. The closing date for comments is February 3 and the legislation under the Finance Bill is planned to take effect from April 6.

Therefore, it is best to be prepared. If you are considering a solvent liquidation to take your money out of the company at 10 per cent tax, you may wish to do this before April 2016.

Remember, if you are thinking of selling a business, you should always seek professional advice as tax rules do change.