Entrepreneurs Relief Query

Posted by sandy man PM | on Thu, 07/07/2011 - 17:01 1836 5 comments | report

Husband has worked for a company for over 10 years as a director. He owned 25% of the ordinary share capital and 8 years ago transferred the shares to his wife who is not employed by the company. She has received dividends since then and these were paid into their joint bank account.

Due to a shareholder dispute the other 3 shareholders have suggested that the company buy-back the shares and the husband leave the company.

Is it following tax position correct?

In order for the share buy-back to be treated as a capital distribution (i.e. taxed as a capital gain rather than a dividend) the shareholder must have held the shares in excess of 5 years.
In order to obtain Entrepreneurs Relief (taxed at 10% rather than 28%) the shareholder must have been employed by/or have been an officer of the company for the preceding 12 months.

If the above are both correct only condition 1 is met. (If both conditions are to be met the shares would need to be transferred back to the husband and he would need to hold them for a further 5 years. This is not an option.) The husband and wife have been told by the other shareholders that spousal relief will apply and the wife will qualify for Entrepreneurs Relief.

Questions:

I can find no reference to the availability of “spousal relief” and should appreciate any advice,
Would the situation be improved if the shares were held jointly by the husband and wife for the next 12 months before sale (assuming the husband remains employed during this time?

3. AAny suggestions of ways to mitigate the potential tax liability are welcome

All comments and suggestions received will be much appreciated

Comments

Who gave the advice

geoffmw | Fri, 08/07/2011 - 05:48 | Permalink

to transfer the shares to wife 8 years ago? What ,if any, caveats were included?

Seems that husband may have a claim against those advisers if the position is not watertight but mitigated by the tax saved as a result of the transfer.

I come to the conclusion that H wants to have his cake and eat it.

.

blok | Fri, 08/07/2011 - 09:23 | Permalink

To be fair to the advisors. Eight years ago ER was not there and the shaers would have qualified for Taper.

There is nothing that can be done, apart from the wife becoming an employee for 12 months.

Transfer shares back

gbuckell | Fri, 08/07/2011 - 09:53 | Permalink

There are no special rules for husband and wife in relation to entrepreneur's relief.

Making the spouse an officer or employee for a year, as already suggested, is an option.

The other option is to transfer a 5% holding back to the husband for a year. This allows dividends on the remaining 20% to continue to be received by the wife.

In one year the wife can transfer the other 20% and a purchase of own shares undertaken. The 5 year ownership period is satisfied - see CTA 2010 s1036.

Entrepreneurs Relief

sandy man | Sun, 10/07/2011 - 18:54 | Permalink

Thank you gbucknell

Transferring 5% to the husband now for one year appears to enable the husband's new 5% shareholding to both qualify as a capital distribution and for Entrepreneurs Relief.

However, will the remaining 20% held by the wife still fail to qualify for Entrepreneurs Relief?

Would the situation be improved if all the shares were transferred to the husband for a year or held jointly?

.

cparker87 | Wed, 13/07/2011 - 13:33 | Permalink

As long as 5% is owned for 12 months, even if you increase your stake substantially prior to any disposal, ER will still apply (assuming criteria still met). You do not segregate holdings in the same company into ownership periods.

As for the 20% retention by the wife, I believe gbuckell has suggested that so as to continue to utilise the BRB over the next year for dividends.

On transfer from wife to husband of the shares, the husband acquires the ownership period for the purposes of purchase of own shares under CTA 2010. (5 year rule)