Entrepreneurs Relief Question

[northcave]

Hello. May I ask a questions about Entrepreneurs relief. I have been advised that I can get EN relief on excess cash in by business and the HMRC are generally relaxed about it providing there is a genuine reason for holding that cash. I have read their documentation.

However, the question I have is about selling 50% of a business and how that affects EN relief. Am I right in saying that this is how such a deal might be structured?

Facts:

• I would like to sell 50% of the share capital of the business for £10

• There is £5 of cash in the business.

Prior to the deal, I restructure the shares so that 50% are A shares and 50% are B shares. They would carry all the same rights with the only difference being the ability to pay varying dividends between the classes.

On the day of the deal, the A shares (being 50%) are bought by the purchasing company for £10 (50% goodwill plus all the cash) and then a dividend equating to the cash in the business (£5) is voted on the A shares. No tax is payable as the acquiring party is another company. That cash plus the £5 of the purchaser's own funds would then be used to pay you the full £10 for the A shares. The paperwork would show that the payment is effectively on behalf of the purchasing company as part of the full £12.

The £10 I receive is for 50% of the company's share capital. That is a Capital Gain subject to CGT which should qualify for Entrepreneur's Relief.

You would continue to own the B shares, being 50% of the company.

 

[UK Contractor Accountant]

For £10 i would not worry yourself to much about ER!

 

[northcave]

Very Useful thanks. If you want to add several 0's for it to be worth your advice then be my guest.

Edit of original:

The paperwork would show that the payment is effectively on behalf of the purchasing company as part of the full £10

 

[john1989]

It is useful.

If you are talking about a gain of less than £11,100, ER is academic.

 

[David Griffiths]

And if there is substantial money involved taking advice on a forum is reckless. You need proper advice from somebody in possession of all of the facts. One of the first questions that I would ask is why the share classification is being changed. There is a raft on anti avoidance legislation under the general banner of cancelling a tax advantage arising from a transaction in securities.

The other factor is that selling a 50% stake to anybody without legal advice is possibly worse than reckless. The whole structure of the company needs to be looked at, and proper agreements put in place to cover not only the sale but the governance of the company in future

 

[UK Contractor Accountant]

Very Useful thanks. If you want to add several 0's for it to be worth your advice then be my guest.

Edit of original:

The paperwork would show that the payment is effectively on behalf of the purchasing company as part of the full £10

I think you could add several £'000's for the professional tax planning advice relating to transactions in securities, artificial structures to gain tax advantages, substantial cash/investments and ER etc.