Tag: ER

Can a Property Flipper or Developer use Entrepreneurs Relief?

City Developer

Property Flipping and Development are Trades (not investments), so YES, they could qualify for Entrepreneurs Relief.

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Work out if you qualify

You’ll qualify if you dispose of any of the following:

  • all or part of your business as a sole trader or business partner – including the business’s assets after it closed
  • shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)

https://www.gov.uk/entrepreneurs-relief/eligibility

5 Pitfalls to avoid with Entrepreneurs Tax Relief

How does Entrepreneurs Relief help?

Let’s take an example using a Company

Flipping or Development Profit £100,000

Corporation 20% £20,000

Profit after Tax £80,000

If close the business and you apply Entrepreneurs Relief the you will pay 10% tax = £8,000

You will also get your CGT allowance of £11k deducted first.

Without Entrepreneurs Relief the tax would 20% or even more if the distribution was via dividends or salary. For unincorporated businesses the tax could be 20%, 40% or 45%!

What are the rules for ending a business?

  • The business has ceased.
  • The assets were in use at the time of cessation.
  • The business was owned for 1 year by the individual prior to cessation.
  • The assets were disposed of within 3 years of cessation.
  • The assets are not held as investments.

However, if you do the same thing within 2 years HMRC may consider that you are only doing this to gain a tax advantage and it could then be treated as income.

steve@bicknells.net

 

Don’t mix up your property investments with your main business

Entrepreneur startup business model

There are lots of good reasons to keep property investments in their own companies rather than mix them up with your main business activity.

We have a blog explaining why residential investments should be in a company https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Entrepreneurs Relief when you sell your business is one of the major reasons not to have property in your trading business as significant Non Trading Activity will be a problem, if a business contains investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business.

What is Entrepreneurs Relief

Entrepreneurs Tax Relief applies if you sell or close your business and means that you only pay 10% Capital Gains Tax on any qualifying profits.

There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.

Companies

To claim Entrepreneurs’ Relief you must:

  • own at least 5% of the shares in the business for a year
  • be a director, partner or employee of the business

Sole traders

To claim Entrepreneurs’ Relief you must have been trading for at least a year.

Full details are on the HMRC Helpsheet HS275

steve@bicknells.net

Loan Notes – A Seller’s Dilemma

Retro Drama Woman

When you sell your company your buyer may wish to pay part in cash and part in loan notes to be paid off from future profits. The Loan Notes are known as Qualifying Corporate Bonds (QCB’s), the dilemma is whether to claim Entrepreneurs Tax at 10% now or pay full Capital Gains Tax later.

To obtain Entrepreneurs’ Relief on a disposal of the shares (the “old asset”) at the time of the exchange, the individual may make an election for the gain not to be deferred by TCGA92/S116 (10). The effect of an election is that the gain is brought into charge at the time of the exchange so that Entrepreneurs’ Relief can be claimed in order to benefit from the 10% rate – TCGA92/S169R (2).

In the absence of an election the gain is deferred and will be charged to CGT when it accrues under TCGA92/S116 (10) (b). It would be unusual for the qualifying conditions for Entrepreneurs’ Relief to be met at the later date when the gain comes into charge.

An election under this section, like the claim for Entrepreneurs’ Relief, must be made on or before the first anniversary of the 31 January following the tax year in which the relevant transaction takes place – TCGA92/S169R (4).

So would you claim the Entrepreneurs Tax Relief and pay 10% now or possibly pay 28% later?

You could try selling your shares in stages but that might not suit either you or your buyer?

steve@bicknells.net

 

5 Pitfalls to avoid with Entrepreneurs Tax Relief

with computer

If you sell or close your business, you may be able to claim Entrepreneurs’ Relief – this means that you only pay 10% Capital Gains Tax on any qualifying profits.

There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.

Companies

To claim Entrepreneurs’ Relief you must:

  • own at least 5% of the shares in the business for a year
  • be a director, partner or employee of the business

Sole traders

To claim Entrepreneurs’ Relief you must have been trading for at least a year.

Full details are on the HMRC Helpsheet HS275

But here are some pitfalls to avoid…….

  1. Entrepreneurs Tax Relief is not available to companies, so if your company sold the part of its business then that won’t qualify, it’s common for a buyer to want to buy the assets into a New Co but ask that the old company remains alive in case of future claim.
  2. Significant Non Trading Activity could be a problem too, some business contain investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business
  3. Less than 5% share ownership this can be an issue where share options are granted and exercised before a sale
  4. Voting rights of classes of shares or when at an AGM votes are based on a show of hands
  5. Shares transferred to a non working spouse prior to sale to save tax – to qualify you have to be an employee/officer and hold the shares for a year

steve@bicknells.net