If you are closing or exiting your company and have retained asset value there are two ways you may consider for tax planning purposes.
- Entrepreneur's Relief
- Capital Distribution (ESC C16 which we have covered previously)
In certain circumstances, for example where there is a cash value to be distributed; ESC C16 may be applied for a capital distribution and then Entrepreneur's Relief claimed making a 10% effective capital gains tax rate.
What is Entrepreneur's Relief?
Entrepreneur's relief allows the capital gains tax on the disposal of a qualifying asset to be reduced; therefore reducing the amount of capital gains tax (CGT) due.
It was introduced in April 2008 to replace the previous Taper Relief calculations on capital gains made before 5th April 2008.
The relief is allowable on business assets that have been disposed of, on or after 6th April 2008 and claims need to be made in writing to HMRC by January 31st, 1 year and 10 months following the tax year in which the disposal was made.
The relief is subject to a lifetime limit of £1,000,000 for capital gains per individual and may be claimed multiple times up to that limit.
Who may qualify?
The relief applies to individuals and some trustees of settlements but not to companies.
It is available where:
- Gains are made on the disposal of part or all of a business
- Gains made on the disposal of assets following the cessation of a business
- Gains made by individuals who were involved in running a business
The claimant must have owned the business for a minimum one year period before the disposal of the asset or the cessation of the business.
For Professional Contractors and Freelancers with Personal Companies owning more than 5% shareholding, the relief is allowable on the capital gain value of shares.
Where there is a joint shareholding between spouse or partners, each individual is allowed the maximum £1,000,000 limit for relief.
For businesses that own assets such as plant and machinery, land or buildings, the calculation for valuing the asset varies from that of shares value. You can find full details of the calculation on the HMRC website.
Where assets are transferred to husbands, wives and civil partners, capital gains tax is not applicable.
How is the relief calculated?
The net aggregated (of losses and gains) capital gain is discounted by 4/9ths and this amount is then charged capital gains tax (CTG) at the rate of 18% for the years 2008/09 and 2009/10.
The effective rate of tax is 10%.
Gains in excess of the £1,000,000 will be taxed at 18%.
Example
In March 2009 you close your company after trading for six years.
Shares value £220,000
Net Capital Gain £220,000
£220,000 / 9 x 4 £97,777
Gain for CTG purposes £122,223
CGT at 18% £22,000
Therefore the £22,000 is an effective 10% tax rate of the £220,000 capital gain.
How is a claim made?
Claims need to be made by 31st January 1 year and 10 months after the tax year in which the gain was made.
2008-2009 Claim by 31st January 2011
2009-2010
Claim by 31st January 2012
Claims should be made on your Self-Assessment Tax Returns (SATR) or by completing Section A of form Section 169M TCGA 1992 (the last page of the link) if you are too late to put it on the SATR.
Useful Link
HMRC helpsheet 2009