Yesterday we reported on the changes to Entrepreneurs’ Relief (ER) in this year’s Budget. While it’s vital for business owners to keep on top of developments in this area, it’s also important to remember that planning for ER does not just exist in isolation. At Progeny, thanks to our unique framework of coordinated advice and insight, we look at your entire situation alongside all other areas of your financial and legal life.
Weighing Everything Up
Entrepreneurs’ Relief is a tax relief on a sale during your lifetime. But while organising your affairs to take advantage of this ahead of a business sale, it’s important not to lose sight of your planning for Inheritance Tax. The two need to be weighed up simultaneously.
For business owners, particularly those coming towards the end of their careers, it’s important to keep in mind that if they’re selling their business, the maximum Entrepreneurs’ Relief they can receive is 10% on a maximum sale allowance of £10 million, so £1 million. In some cases, there is a tendency to fixate on securing Entrepreneurs’ Relief to the exclusion of all else, but this can be a big error.
For example, a business owner who sells their business for £10 million but dies shortly afterwards can face a further 40% Inheritance Tax (IHT) bill on the proceeds if they haven’t prepared and planned properly for IHT (please see our recent Inheritance Tax Planning series for more details).
Sitting Tight on Shares
It can also be tempting for owners to chase Entrepreneurs’ Relief by giving away shares (to reduce Capital Gains Tax liability), but in terms of tax planning it can often be better to hold on to them, particularly if there is no sale envisaged in the next two years.
On death, assuming your business qualifies for Business Relief from Inheritance Tax, you will not pay any IHT. Additionally, the value of the shares gets uplifted for Capital Gains Tax purposes to the market value on date of death, so if they are sold shortly afterwards, assuming they haven’t increased in value much, there’s little or no tax to pay at all. In this instance Entrepreneurs’ Relief is irrelevant, so there’s no need to go chasing it if there’s no sale on the horizon.
The Next Generations
Sometimes business owners seek to use their children to save on their tax bill. If the main owner has children who are involved in the company, they can give them 5% of the shares in the business so that they can claim ER on this amount. However, deciding to do this will also mean that the owner will receive 5% less of the profits of the sale.
An alternative to this, in situations where a sale in the relatively near future is achievable, is for business owners to transfer shares in the business into a trust for their children and grandchildren. If they qualify for Business Relief, there is no limit to the number of shares that can be put into trust before the sale takes place. If they do this two years before the sale, as well as meeting other qualifying conditions, they also have the ability to claim both Entrepreneurs’ Relief and Business Relief – effectively getting two lots of relief on the same shares (again, more details on this can be found in our recent article).
Whether you are planning and preparing for Entrepreneurs’ Relief or Inheritance Tax, the key message is that it’s essential to look at all issues facing your business as a whole, and well in advance of selling or passing the business on. To find out how we can help you assess the full picture and ready your business for all eventualities, please get in touch.
The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Private Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.