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More privately owned businesses are changing hands these days, thanks to confidence in the economy and a backlog caused by a reluctance to sell or buy in the recession.
However, despite more deal activity, capital gains tax (CGT) planning is often not being considered in enough detail or far enough ahead.
So says Jon Croxford, a partner and tax planning specialist at West Midlands-based private client law firm Meridian Private Client LLP.
Mr Croxford is mainly talking about 鈥榚ntrepreneurs鈥 relief鈥, which provides owner-managers of businesses with significant CGT benefits by allowing gains to be taxed at ten per cent when their businesses are sold rather than the normal CGT rate of 28 per cent for a higher rate taxpayer.
鈥淎n individual鈥檚 savings from this tax break can be as much as 拢1.8 million鈥 said Mr Croxford, who adds that certain conditions have to be met for entrepreneurs鈥 relief to be available.
鈥淭he business must be a trade, not an investment and difficulties arise when a business combines both elements. This can even happen inadvertently鈥 he said.
鈥淔or example, if a successful trading company generates cash which is surplus to trading requirements and which constitutes more than 20 per cent of the assets of the business, the relief may be lost鈥.
However, Mr Croxford points out that careful planning can help to secure the relief even in these circumstances.
He said: 鈥淪uch surplus cash can be re-invested in trading activities. Alternatively, where there are separate trading and investment activities, it may be possible to split the existing company into separate trading and investment companies鈥.
He adds that the individual shareholder must, over at least a year prior to disposal, have met certain conditions for entrepreneurs鈥 relief to be available.
鈥淚f the business is held within a company, the individual must own at least five per cent of the ordinary shares and must also be an officer or employee, although not necessarily full-time鈥 he said.
鈥淎s long as you plan ahead, you may be able to ensure that the business complies with the rules.
鈥淚t may be possible to go further by changing the shareholding structure to secure entrepreneurs鈥 relief for both husband and wife where they both have an appropriate role in the business. This could increase the tax break to 拢3.6 million.
鈥淧rofessional advice should always be taken well in advance of the sale of a business.鈥
鈥 Jon Croxford is partner and tax planning specialist at West Midlands-based private client law firm
