Business Asset Disposal Relief (BAD Relief!)
Formally called Entrepreneur’s Relief –
How To Use it To Save Tax!
As we all know, when a company is sold, it is the shareholders who will be making a ‘gain’ – and so the tax that is paid will be Capital Gains Tax (CGT).
Where the business sale is of a ‘trading company’ rather than an ‘investment company ‘ the shareholder can make use of Business Asset Disposal Relief (formally Entrepreneur’s Relief) – which reduces the tax rate on the gain down to 10%. This is one of the most generous reliefs available, and applies to lifetime sales totalling £1m per shareholder.
It is logical therefore to start with who owns the shares – if the shares are held purely by 1 individual then, the £1m limit is all that is available. If the shares are owned by 2 people, such as a husband and wife, the total would double to £2m (£1m each). Planning early in the life of the company by spreading the share ownership is always a helpful thing – especially if there is a plan to sell the business in the future.
Another thing to note is that the buyer need not be to another un-related individual, it could be to a tax efficient structure, such as a QNUPS (Qualifying Non UK Pension Scheme). The QNUPS can be in the name of the shareholder, so is not a 3rd party in the way we see the relationship. Obviously the shares need to be properly valued and all the boxes ticked in terms of the sale… but you get the idea.
In this way, the shares can be sold early on in the life of the company when they have a much smaller value. Whilst this will trigger a CGT liability based on the sale price, it will be at 10% and could well be a very low figure. Then when the company is ‘sold’ to a 3rd party (or indeed floated) – the bulk of the gain will now fall inside the QNUPS and be exempt from paying even the 10% CGT that the Entrepreneur’s Relief would have granted.
Here’s an example:
a) Company is valued at £250,000.
b) 100% of the shares are sold to the QNUPS for £250,000
c) CGT is charged at 10% – creating a tax liability of £25,000
d) When the company has grown and is sold for £5m – the QNUPS will receive £5m tax free.
e) There will be no 10% tax on the 1st £1m and no higher rate CGT on the remaining £4m either.
If the shares are put into the QNUPS when the company was formed, they will have a zero value and therefore there will not even be the £25,000 CGT.
Where the company has grown and is worth enough for the share sale to be an issue – in that the 10% CGT is a LARGE amount – it is possible to create a special class of shares and put them into the QNUPS instead. This splits the company value into the A shares (the value up to the date of creation of the NEW shares) and the B Shares (all value in excess of the value held within the A shares.
What this would look like in the example above, would be this:
a) A shares hold the first £250,000 of value and are retained by the individual shareholders who will pay the £25,000 when the company is sold.
b) B shares would hold all the value above the £250,000 – which on sale would be the £4.75m difference between the £250,000 and the £5m.
c) If the B shares were inside the QNUPS, there would be no tax to pay on the £4.75m
As with all complex planning, it is really important that all the steps are carried out correctly – to ensure that HMRC agrees with the values and the taxes due. However, we do have access to the very best advisors who specialise in this area – making our planning another great way to use your Entrepreneur’s Relief to save tax!
Most Advisors, such as IFA’s and Accountants do not have the internal experts to assess a client’s FULL situation – and come up with the best overall strategy.
As I have worked in the pensions and tax planning field for over 30 years, I have personal access to experts in all taxes and can combine these experts into a unique service that really does go beyond what you’d get from your normal ‘Advisors’.
Every wealthy entrepreneur or property investor I have ever met had their own Accountant, Solicitor and Financial Advisor – yet in 90% of cases we were able to dramatically able to improve their overall exposure to UK taxes and access to their pension money.
What is vital is the proper implementation – with care at every stage.
This is why we offer a FREE consultation – as it lets us explore your current situation before jumping in with ‘solutions’.
If you are interested in seeing if your pension can be used to help support your business – then call us now, or send us your details and we will call you back.
We look forward to helping you soon.