14 May 2013
Thinking of transferring or selling your business?
For most entrepreneurs getting a new venture off the ground, making a profit and building a successful enterprise are what really matters and thoughts about transferring or selling the business are unlikely to be uppermost in their mind.
However, as Craig Williams, private client partner, explains, there are a number of reliefs available which enable you to mitigate the tax due on the capital value of your business, making sure you exit the business in the most efficient way and with the approval of Her Majesty’s Revenue and Customs.
The two principle reliefs are Entrepreneurs Relief (ER) and Business Property Relief (BPR). The former is available if you transfer or sell the business during your lifetime and the latter is available if you transfer your business on your death.
This is a relief from Capital Gains Tax (CGT) which was introduced in 2008. The lifetime limit on qualifying gains is £10 million and these are taxed at 10% as opposed to 28% (overlooking the lower 18% rate of CGT). So, over a lifetime, the potential benefit from ER in terms of CGT saved is £1.8 million per individual.
Qualifying gains may include:
• the whole or part of a business;
• assets used in a business which has now ceased, provided they are disposed of within three years after cessation; or
• shares in which the individual holds at least 5% of the ordinary voting share capital and is an officer or employee (though with no minimum working requirement).
The business must be (loosely) a trading business (rather than an investment business), if ER is to apply. The business assets or the shares must have been owned for a period of at least 12 months.
Business Property Relief
This is a relief given, either at 100% or at 50%, on a ‘chargeable transfer’ of ‘relevant business property’ which has been owned for at least two years. There will be a chargeable transfer (a) on death where the beneficiary is other than a surviving spouse/civil partner or a charity or (b) on a lifetime gift to an individual (a potentially exempt transfer or PET) where the donor fails to survive for seven years.
A lifetime gift to a trust (whether for the benefit of one or more individuals or on a discretionary basis) will be an immediately chargeable transfer, albeit with a chargeable amount of nil if 100% relief applies.
The expression ‘relevant business property’ embraces six different categories of property, the principal ones being an interest in a business (which must be carried on for gain) and unquoted shares, both of which qualify for 100% relief.
Three categories of property attract 50% relief, including land or buildings used in the business but owned outside the business by a partner in the partnership or a controlling shareholder in the company which carries on the business. The relevant business property must have been owned for at least two years.
The term ‘business’ is a wide one, embracing both trades (which generally attract relief) and investment activities (which do not). Assets within the qualifying business which are either private (for example a residence) or surplus to business requirements are denied relief, as so-called ‘excepted assets’.
The arguments for gifts on death
It is, adds Craig, generally preferable to make gifts on death rather than during lifetime.
“As long as BPR remains at 100%, it is likely to be more tax efficient to make the substantive gift of the business on death in your will,” he said.
“While, perhaps in order to incentivise the younger generation, a measure of lifetime giving might take place, there are three advantages in waiting until death to make the gift:
1. there is no CGT to pay, with the beneficiary acquiring the asset for CGT purposes at market value at death;
2. attention does not have to be given to either (a) the reservation of benefit rules for IHT purposes under which generally a gift is ineffective if the donor retains a benefit from it; or (b) the clawback rule, which retrospectively denies BPR in the event of the donor’s death within seven years unless the donee(s) continue(s) to own and run the business at that point; and
3. decisions on succession can be deferred – albeit not always a good thing.”
The argument for lifetime gifts
There may however, says Christine, be occasions when it would be appropriate to bring one or more children into the ownership of the business, especially if they are working in it, for which lifetime gifts will be necessary.
With the benefit of 100% BPR, he says there should be no IHT consequences of a gift (even if made to trustees), provided the donor does not reserve a benefit and the clawback rule is satisfied.
However, there will be a disposal for CGT purposes on which ER may be available. If this is the case the donee would take the gift at the market value at the date of the gift.
Alternatively, it is possible to “hold over” the gain arising on the disposal, so that the donee takes on the donor’s acquisition cost. Hold-over relief will usually be claimed to defer CGT on a lifetime gift, but it might be sensible to accept a CGT liability at 10%: the advantage would be that the market value at the date of the gift would then be taken on by the donee, as opposed to the donor’s historic acquisition cost if the gain were to be held over.
“Entrepreneurs’ need to think about the timing of the disposal of their interest in their business,” concluded Craig. “It’s clear that this will depend on a number of circumstances and it’s important to take professional advice before making any decisions.”