Entrepreneurs' relief on the disposal of shares in a personal company

Entrepreneurs’ relief is a very valuable relief that can significantly reduce the tax payable on the sale of a business. Where the conditions for relief are met, capital gains are taxed at 10% rather than at 28% to the extent that the lifetime limit (£10 million from 6 April 2011 onwards) remains available. Spouses and civil partners each have their own lifetime limit.

Availability of relief

Relief is available where there is a disposal of qualifying business assets. One category of assets that may potentially qualify for entrepreneurs’ relief is the disposal of shares or securities in the taxpayer’s personal company. To qualify, the shares must be disposed of while the company is a trading company or a holding company of a trading group, or within three years of the date on which the company ceased to be a trading company or a member of a trading group.

Meaning of ‘personal company’

For entrepreneurs’ relief purposes, a company is a personal company if you hold at last 5% of the ordinary share capital and that holding gives you at least 5% of the voting rights in the company.

One-year qualifying period

Additionally, relief is only available if throughout the one-year qualifying period, the company is:

• your personal company;
• a trading company or the holding company of a trading group; and
• you are an officer or employee of that company or of one of the members of that trading group.

The one-year qualifying period normally runs to the date on which the shares or securities are disposed of. However, if within the three years prior to the disposal, the company ceased to be a trading company or a member of a trading group, the one-year qualifying period runs to the date on which the company ceased to be a trading company or a member of a trading group.

Entrepreneurs’ relief may also be available if the company is wound up and dissolved, the shares are cancelled and a capital distribution is made in the course of the winding up; or if any other capital distribution is made. In this case, the one-year qualifying period runs to the date on which the capital distribution is made or, if earlier, the date on which the company ceases to be a trading company or a member of a trading group (in which case the capital distribution must be made within three years of that date).

Spouses and civil partners – planning ahead

Each spouse civil partner has their own lifetime limit. However, to qualify for the relief, each must meet the qualifying conditions, including holding at least a 5% stake in the company throughout the one-year qualifying period. If one spouse or civil partner does not hold the requisite 5%, transferring shares on a no gain-no loss basis at least a year before the planned disposal date can maximise the relief available.

Need to know: Entrepreneurs’ relief is available on the disposal of shares or securities in a personal company, but only if the qualifying conditions are met throughout the one-year qualifying period.

If you need further advice on entrepreneurs' relief on the disposal of shares in a personal company or information on any other tax related matters please get in touch with us at Inform.

Read earlier tax blogs:

Making the most of profit extraction and current dividend rules

Tax-Free mileage payments

Deferring Capital Gains tax