The disposal of an unincorporated business, or of shares in an unquoted trading company, as well as assets used in such a business or company, can give rise to capital gains tax (CGT) at 18% or 28% of any gain realised depending on the seller’s marginal rate of income tax and subject to any annual exemption which may be available. The amount of CGT payable may be mitigated by Entrepreneur’s Relief (ER) in appropriate cases. Where available, ER reduces the rate of CGT to 10% on the first £10 million of gains. A disposal may arise on sale, gift or on liquidation of a company.
Where the interest is in shares in an unquoted trading company, the individual must have owned at least 5% of the shares either:
- Throughout the 12 months prior to a sale of those shares or
- Throughout the 12 months prior to the company ceasing to trade, and the individual must then dispose of those shares within three years of that cessation
The Finance Act 2015 introduces two restrictions to ER:
- From 18th March 2015 a corporate partner in a partnership will not be regarded as trading solely by virtue of its interest in that partnership, so unless that company carries on a trade which is separate from that which is carried on by the partnership, ER will no longer be available on a disposal of the shares in that company.
- In the past, individuals unable separately to invest as much as 5% in a trading company might have overcome this restriction by forming a “feeder company “ which would then make the investment in the trading company. This was possible provided not more than five individuals owned at least 75% of the feeder company and the feeder company owned at least 10% of the trading company. An individual owning at least 5% of the feeder company would then be treated as owning sufficient shares in a trading company and if the other conditions were met, would be entitled to ER on a disposal of his shares.
HMRC did not approve of such arrangements and as a result of Finance Act 2015 changes, ER will no longer be available in such circumstances unless the feeder company is trading in its own right.
Clients who may be affected by these changes are recommended to contact their relevant partner