Jacqui Gudgion, Senior Tax Manager writes:
With such a valuable tax relief at stake there is often an assumption that it is available without paying attention to ‘the devil in the detail’ we tax advisers love so much. So what are the most common traps that people fall in to and how can you avoid the pitfalls? Here are some examples of howlers I have come across that can easily be avoided with a bit of forward planning……
You are a director who over the course of your employment has acquired 7% of the ordinary share capital. To avoid complications when it comes to decision making at Board level, however, you were given non voting shares. Unfortunately, although you have exceeded the minimum 5% requirement, qualifying shares are not just ordinary shares but ordinary voting shares. It is important to ensure the shares you hold are qualifying assets for the purposes of the relief.
You have been a shareholder/director for years holding 10% of the ordinary voting shares but retired from the company two years ago. You now take an annual dividend without the bind of being a director or employee of the company. You have to be an employee or office holder (not necessarily a director, maybe company secretary) to qualify for the relief. There is no minimum working hour’s requirement and if you are an office holder, there are duties that go with that role that you need to be comfortable with if this is new to you.
A sale transaction was anticipated as the business is highly desirable and so you negotiated to buy 5% of the ordinary share capital 6 months ago. That was good planning……. but not good enough. You must hold at least 5% of the ordinary voting share capital in your capacity as an employee or office holder for at least 12 months prior to sale.
The company has been very prudent over the years and has invested surplus cash in a small portfolio of equities and investment property. In fact, about 30% of the asset value and income comes in without needing to worry about the trading performance. No hard and fast rule here but it’s dismaying when we confirm that the individual qualifies for relief, and then find the company doesn’t quite cut the mustard as a qualifying trading company. The rules in this area are complex and as long as action is taken in good time, there is generally a solution to ensure that entrepreneurs’ relief will be available.
And the moral of the story? Sometimes commercial decisions are taken that are absolutely right at the time but investing in a review with a tax expert can identify potential risks to valuable tax reliefs and offer solutions to consider building in to a master plan. The rules in this area can be complicated and although we always say, ‘never let the tax tail wag the commercial dog’, generally, we can teach an old dog some new and very valuable tricks!
For more information on how Price Bailey can support you and your business, please contact the Tax team directly