How do they do that?
Discussion
Eric Mc said:
They mat pay tax at the reduced Entrepreneur's Relief rate or may be escape tax by rolling over the taxable gain into a new trading activity.
How about if they were selling up to retire? If you sell even a limited company I guess the funds go to the individual. I can't believe he'd really pay 45% tax on it, making his £120M fortune a mere £66M...Simpo Two said:
Eric Mc said:
They mat pay tax at the reduced Entrepreneur's Relief rate or may be escape tax by rolling over the taxable gain into a new trading activity.
How about if they were selling up to retire? If you sell even a limited company I guess the funds go to the individual. I can't believe he'd really pay 45% tax on it, making his £120M fortune a mere £66M...However, if that's the selling price, it makes no mention of the costs and debt incurred in getting to that stage. Could be that he owes £119 million.
Super Slo Mo said:
However, if that's the selling price, it makes no mention of the costs and debt incurred in getting to that stage. Could be that he owes £119 million.
His company may have owed £119M but that would have been taken into account in the sale price...I can see how one can pile up a vast fortune in business, but unclear how you actually get hold of it to spend on Monaco yachts etc.
Super Slo Mo said:
Simpo Two said:
Eric Mc said:
They mat pay tax at the reduced Entrepreneur's Relief rate or may be escape tax by rolling over the taxable gain into a new trading activity.
How about if they were selling up to retire? If you sell even a limited company I guess the funds go to the individual. I can't believe he'd really pay 45% tax on it, making his £120M fortune a mere £66M...However, if that's the selling price, it makes no mention of the costs and debt incurred in getting to that stage. Could be that he owes £119 million.
There are restrictions to it. For instance, it generally relates to TRADING companies or sole tradership/partnerships only and NOT investment activities.
OK let's run some numbers. I start a company in 1990 with £1,000. I'm a business genius and in 2015 I decide to retire and sell up for £120M. The company has no debts, it's all accumulated profit.
But perhaps if I was a business genius I'd have had some expensive advisers who wouldn't have let me get into that situtation...!
But perhaps if I was a business genius I'd have had some expensive advisers who wouldn't have let me get into that situtation...!
Entrepreneurs relief, if allowable, means you pay just 10% on the accumulated profits when closing down or selling the business.
So your bill (in simple terms) would be £12M in this case above.
https://www.gov.uk/entrepreneurs-relief/eligibilit...
So your bill (in simple terms) would be £12M in this case above.
https://www.gov.uk/entrepreneurs-relief/eligibilit...
The various reliefs for those disposing of businesses are outlined here.
https://www.gov.uk/capital-gains-tax-businesses/re...
Note that there is a "Lifetime Limit" on how much of these gains can obtain the reduced tax rate under Entrpreneur's Relief. It's currently £10 million.
Our hypothetical case mentioned above would still have a substantial amount of "ordinary" CGT to pay on his gain - unless he did something else, like reinvest the proceeds of the sale in a new business/trading activity.
https://www.gov.uk/capital-gains-tax-businesses/re...
Note that there is a "Lifetime Limit" on how much of these gains can obtain the reduced tax rate under Entrpreneur's Relief. It's currently £10 million.
Our hypothetical case mentioned above would still have a substantial amount of "ordinary" CGT to pay on his gain - unless he did something else, like reinvest the proceeds of the sale in a new business/trading activity.
Eric Mc said:
What, you would want advisors who stop you from being successful?
Spoken like a true accountant 
Money in the business is money I can't spend on myself, therefore useless. Unless luxury yachts and houses in Bermuda are tax deductible, which seems unlikely.So mostly CGT at 28% then. Better than 45% I guess.
Mind you all this is assuming everything happens in the UK. Quite possibly if I was clever enough to make £120M I'd be dealing on the global stage, which no doubt has more possibilities.
Not every successful business person wants to spend all the money they make on themselves. In fact, the most successful tend to be quite reluctant to pull massive amounts out of their businesses and instead prefer to leave the bulk of it in the business so the business can grow and explore - and exploit - new ideas.
Eric Mc said:
Not every successful business person wants to spend all the money they make on themselves. In fact, the most successful tend to be quite reluctant to pull massive amounts out of their businesses and instead prefer to leave the bulk of it in the business so the business can grow and explore - and exploit - new ideas.
Sure - if you're 35. And then you can invest your £120M wisely and make £500M. Or rather you can make your company £500M. But when your stash is big enough to do everything you want to do, what's the point of dying at your desk with billions in the bank?Eric Mc said:
What's the point of whipping it out if you are dying?
As I said, not everyone in business is worried hugely about massive fortunes or leaving pots of dosh to their ungrateful offspring.
The concept is one of enjoying your money while you're young and fit enough to do so, not buying another business or leaving it to children.As I said, not everyone in business is worried hugely about massive fortunes or leaving pots of dosh to their ungrateful offspring.
You never thought of that did you?
Simpo Two said:
Sure - if you're 35. And then you can invest your £120M wisely and make £500M. Or rather you can make your company £500M. But when your stash is big enough to do everything you want to do, what's the point of dying at your desk with billions in the bank?
Because often the people that have the qualities to be able to do this are not the same people that win the lottery on Friday and quit their jobs on Monday I would imagine. Edited by okgo on Monday 4th January 14:36
Simpo Two said:
The concept is one of enjoying your money while you're young and fit enough to do so, not buying another business or leaving it to children.
You never thought of that did you?
Actually, I did - but it isn't relevant in many cases.You never thought of that did you?
As Okgo suggests - GENUINE entrepreneurs tend to be quite restless and driven people - and the last thing they want to do is slob about spending their fortune on fripparies. Some of them are even against leaving large legacies to their families - on principle. They tend to want to look at the next project.
So, that means they roll over their gains into new enterprises - which also attracts tax relief.
Simpo Two said:
OK let's run some numbers. I start a company in 1990 with £1,000. I'm a business genius and in 2015 I decide to retire and sell up for £120M. The company has no debts, it's all accumulated profit.
But perhaps if I was a business genius I'd have had some expensive advisers who wouldn't have let me get into that situtation...!
A few thoughts from someone who makes their livelihood negotiating business sales! But perhaps if I was a business genius I'd have had some expensive advisers who wouldn't have let me get into that situtation...!
If you've grwon that quickly you may well have a split shareholding- ie you may have taken an equity investment from a partner who can help you grow (this could be private equity, trade, or a friend who helped out). When you sell the business you have to split the proceeds.
Also Most growing businesses are not entirely debt free- there is quite a lot of complicated analysis of the ideal debt/equity ratio but it is often the case that your growth can be accelerated by running a level of debt.
A company valuation will typically look like:
a multiple of profits (at +100m you might be looking at a 9-14 multiple of EBITDA)
PLUS excess cash (ie what you have int eh bank LESS the money you need to run the business
LESS all debt and debt like items
So the £120m headline price above could be (at either extreme)
a company making £30m in profit- which was actually valued at £300m but had £180m of debt
or
a company making £8m in profit but which had £22m in the bank!
Very different scenarios.
In either case lets presume that you sell the business for £120m (however it is calculated) and you own 66% of the shares- you are therefore receiving £80m, of which you will pay £8m in tax if you extract the money and pay entrepreneurs relief. Alternatively the business may haev been a subsidiary of a larger company in which case you can hive the money upwards.
Eric Mc said:
As Okgo suggests - GENUINE entrepreneurs tend to be quite restless and driven people - and the last thing they want to do is slob about spending their fortune on fripparies. Some of them are even against leaving large legacies to their families - on principle. They tend to want to look at the next project.
Agreed. So if they can't stop working/making money, and don't want to leave it to their children, you have to wonder where it goes and what all that work and risk has been for!PugwasHDJ80 said:
In either case lets presume that you sell the business for £120m (however it is calculated) and you own 66% of the shares- you are therefore receiving £80m, of which you will pay £8m in tax if you extract the money and pay entrepreneurs relief. Alternatively the business may haev been a subsidiary of a larger company in which case you can hive the money upwards.
That's a great reply; thanks for casting some light on the internal workings. So it seems that the key (as Mr Noble mentioned earlier) is to get 'Entrepreneur Relief' and then you pay only 10% tax on the winnings - not 28%CGT or 45% income tax.Edited by Simpo Two on Monday 4th January 17:01
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