The complexities of Entrepreneur's Relief
QUESTION: I want to transfer some shares in my trading business to my sons while ensuring that all the shareholdings remain tax efficient if the company is sold in the future. In particular, I want everyone to benefit from entrepreneur's tax relief if we sell the company, so that we all only have to pay 10 per cent capital gains tax. Are there any conditions I need to be mindful of?
ANSWER: Entrepreneur's relief (ER) was first introduced in 2008 and is one of the main tax reliefs designed to encourage entrepreneurship and business succession. It is a complex tax relief and there are many conditions to be fulfilled before successfully making a claim.
On a future disposal of your business, ER may be available for each shareholder's first £10m of gains, meaning that capital gains tax (CGT) will only be suffered at a rate of 10 per cent, provided all the qualifying conditions are fulfilled.
Assuming you plan to sell your company after April 5 2019, the shareholders hoping to claim ER must have owned their shares for at least 24 months. The shareholders are also required to have held at least 5 per cent of the shares and voting rights for 24 months and have at least 5 per cent share in the full economic value of the business.
Following the 2018 budget announcements the rules used to determine if the various conditions are met are much more complex than before and if your company has a complex share and financing structure expert advice should be sought to determine if each condition is fulfilled.
When transferring the shares to family members you may want to consider the benefit of transferring a minimum of 5 per cent equity to each shareholder to fulfill this ownership condition before considering a sale of the shares. In most circumstances it is also necessary to hold the 5 per cent shareholding for at least 24 months before sale. If it is impractical to transfer 5 per cent equity to a shareholder it may be worth considering the use of a qualifying EMI scheme as a means of transferring shares.
EMI shares qualify for ER but the conditions are more relaxed, in particular it is not necessary to hold a minimum of 5 per cent shares and the 24 month holding period begins when the options are granted, not when the shares are issued. These generous relaxations are not available to any other type of employee share option.
It is necessary for anyone claiming ER to be an employee or officer of the company for a period of 24 months before share sale. The tax legislation does not define the term ‘employee' for the purpose of this relief but it is recommended that a contract of employment should be in place for each shareholder employee and remuneration should be paid for their role in the company.
Although ER is conceptually quite simple, there are many traps for the unwary. The detailed conditions should be kept under review until such time as a company sale is anticipated. Before gifting or selling shares to the next generation it is also necessary to consider if an immediate Capital Gains Tax charge arises, if Stamp Duty is payable or if the transfer of shares has any Inheritance Tax implications.
There are a number of generous tax reliefs available which should allow you to avoid these taxes, particularly on a transfer of equity to your sons, as long as you ensure that the necessary tax elections are made and all the qualifying conditions are met. With advance planning, it should therefore be possible to sell the trading company in future years and secure a 10 per cent tax rate for each shareholder.
:: Janette Burns (firstname.lastname@example.org) is associate tax director at PKF-FPM Accountants Limited (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.