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Don’t overlook Entrepreneurs' Relief

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20th Oct 2010
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Political posturing during 2010 has turned Entrepreneurs' Relief into an effective vehicle for reducing tax  liabilities of small and business owners, according to Grant Thornton’s Mike Warburton.

In a talk at the IRIS World 2010 event in London, Warburton described Entrepreneurs' Relief as a “sop” to mollify objections from the small business lobby about the withdrawal of business taper relief from April 2008.

The initial conditions for Entrepreneur’s Relief were that the taxpayer needed to own 5% of shares in a firm and there was a lifetime limit of £1m relief that could be claimed. In his March Budget, chancellor Alistair Darling increased the limit to £2m and the Conservatives bumped it up to £5m. “Because the Capital Gains Tax rate has gone up to 28%, the value of Entrepreneur’s Relief [10% rate] has shot up from £80,000 to £900,000, “ said Warburton. “The name of the game is to maximise this for clients.”

To make best advantage of the relief available, he advised:

  • Top up employee/director shareholdings to ensure they pass the 5% threshold
  • Fragment holdings within a family: “They can each bag that £900,000 of relief,” he said.
  • Combine smaller (2-3%) holdings between family members so they can qualify.
  • If you’re selling a business unexpectedly, and some of the shareholders aren’t qualified as directors, consider taking part of the deal in loan notes. “You can sell 95% for non-qualifying corporate bond notes and hold 5% as shares under a put and call arrange. The purchaser will probably be prepared to go ahead with the deal and the seller qualifies for Entrepreneur’s Relief once 12 months have passed. The loan notes also qualify for relief, so you can use the shares to qualify use the relief on the loan notes.
  • Consider setting up a non-trading subsidiary. Employee/directors of non-trading subsidiaries can still qualify for the relief, as long as they’re part of a group that is trading, although Warburton did add, “I’ve not seen that challenged yet…”

Many legal firms have already taken advantage of Entrepreneur’s Relief by restructuring their firms and selling portions to corporate partners, Warburton said.

“You could sell a part of your goodwill and the profits would accrue within the corporate partner. You’ve triggered a 10% charge going in, so the effective tax rate is 28%. With Corporation Tax rates falling and CGT and Inheritance Tax going up, the effective tax rate could be 42-52% if you’re on 100,000+. If you can make profits in a corporate sense, that’s got to be good news,” he said.

“Lawyers are doing it, so it might be worth accountants thinking of it.”

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