Capital gains tax vs Entrepreneur relief on unit sale
Discussion
I have the possibility to sell my current commercial premises as part of a potential sale of my business and have been advised I may have to pay tax on the profit at the capital gains tax rate as opposed to the 10% entrepreneur relief rate due to the fact I own the unit privately and my business pays me rent.
This could mean a difference of paying £27k tax at ER rate or £54k at CGT rate which is quite significant.
Is this right or is there anyway a deal could be structured to prevent this higher tax rate?
David.
This could mean a difference of paying £27k tax at ER rate or £54k at CGT rate which is quite significant.
Is this right or is there anyway a deal could be structured to prevent this higher tax rate?
David.
According to HMRC:
If you’re selling all or part of your business
To qualify for relief, both of the following must apply:
you’re a sole trader or business partner
you’ve owned the business for at least 2 years before the date you sell it
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
https://www.gov.uk/entrepreneurs-relief
If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that. Then you have the option of selling the business as a whole and only paying 10% on the entire disposal. Or selling just the trading company, and then the building separately, if the purchasers didn’t want the building, then liquidating the entire holding company. Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
If you’re selling all or part of your business
To qualify for relief, both of the following must apply:
you’re a sole trader or business partner
you’ve owned the business for at least 2 years before the date you sell it
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
https://www.gov.uk/entrepreneurs-relief
If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that. Then you have the option of selling the business as a whole and only paying 10% on the entire disposal. Or selling just the trading company, and then the building separately, if the purchasers didn’t want the building, then liquidating the entire holding company. Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
PMacanGTS said:
According to HMRC:
If you’re selling all or part of your business
To qualify for relief, both of the following must apply:
you’re a sole trader or business partner
you’ve owned the business for at least 2 years before the date you sell it
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
https://www.gov.uk/entrepreneurs-relief
If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that. Then you have the option of selling the business as a whole and only paying 10% on the entire disposal. Or selling just the trading company, and then the building separately, if the purchasers didn’t want the building, then liquidating the entire holding company. Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
That structure doesn’t work. If you’re selling all or part of your business
To qualify for relief, both of the following must apply:
you’re a sole trader or business partner
you’ve owned the business for at least 2 years before the date you sell it
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
https://www.gov.uk/entrepreneurs-relief
If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that. Then you have the option of selling the business as a whole and only paying 10% on the entire disposal. Or selling just the trading company, and then the building separately, if the purchasers didn’t want the building, then liquidating the entire holding company. Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
If you have a holding company above the trader, a future sale of trader would be by hold on, not the OP. So ER is irrelevant.
Even selling the holding company with the trader underneath it might not work, as in order to qualify for ER, the shares being sold have to be in a company/group that is substantially a trading business. The building would not be a qualifying asset for these purposes, and depending on the other assets and income of the combined business, might mean the aggregate business is not substantially a trading one. Ie, he could screw up ER even on the trade.
Depending on the type of building and the trade, selling the property and trade to a company (ie, incorporating the business into a single entity) might mean the single entity is substantially a trading one. But in order to qualify for ER, you’d obviously be selling the company in the future, ie, the property and the business. There are of course cgt and sdlt implications of incorporation, albeit you might qualify for reliefs.
Selling the property on its own will not give you ER as it’s not a trading asset. It’s a non trading rental asset.
Alpinestars said:
That structure doesn’t work.
If you have a holding company above the trader, a future sale of trader would be by hold on, not the OP. So ER is irrelevant.
Even selling the holding company with the trader underneath it might not work, as in order to qualify for ER, the shares being sold have to be in a company/group that is substantially a trading business. The building would not be a qualifying asset for these purposes, and depending on the other assets and income of the combined business, might mean the aggregate business is not substantially a trading one. Ie, he could screw up ER even on the trade.
Depending on the type of building and the trade, selling the property and trade to a company (ie, incorporating the business into a single entity) might mean the single entity is substantially a trading one. But in order to qualify for ER, you’d obviously be selling the company in the future, ie, the property and the business. There are of course cgt and sdlt implications of incorporation, albeit you might qualify for reliefs.
Selling the property on its own will not give you ER as it’s not a trading asset. It’s a non trading rental asset.
It does work. You sell the trading company, of course the holding company is in receipt, but as long as you liquidate the holding company within 3 years you qualify for ER. I did something similar 5 years ago.If you have a holding company above the trader, a future sale of trader would be by hold on, not the OP. So ER is irrelevant.
Even selling the holding company with the trader underneath it might not work, as in order to qualify for ER, the shares being sold have to be in a company/group that is substantially a trading business. The building would not be a qualifying asset for these purposes, and depending on the other assets and income of the combined business, might mean the aggregate business is not substantially a trading one. Ie, he could screw up ER even on the trade.
Depending on the type of building and the trade, selling the property and trade to a company (ie, incorporating the business into a single entity) might mean the single entity is substantially a trading one. But in order to qualify for ER, you’d obviously be selling the company in the future, ie, the property and the business. There are of course cgt and sdlt implications of incorporation, albeit you might qualify for reliefs.
Selling the property on its own will not give you ER as it’s not a trading asset. It’s a non trading rental asset.
I’m making an assumption here that the trading company is the bulk of the business. If it isn’t, then the above may well apply.
Edited by PMacanGTS on Friday 29th November 04:52
PMacanGTS said:
It does work. You sell the trading company, of course the holding company is in receipt, but as long as you liquidate the holding company within 3 years you qualify for ER. I did something similar 5 years ago.
I’m making an assumption here that the trading company is the bulk of the business. If it isn’t, then the above may well apply.
Yes it could apply on a liquidation, but depends on the trading status of the combined business, and the situation you’re referring to is more relevant when it’s a pure holding company. In this scenario, a liquidation would pass the property back to OP - that doesn’t achieve his aim of selling it (with ER)?I’m making an assumption here that the trading company is the bulk of the business. If it isn’t, then the above may well apply.
Edited by PMacanGTS on Friday 29th November 04:52
PMacanGTS said:
According to HMRC:
If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that.
Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
Surely "moving the building" into any corporate entity effectively amounts to sale and therefore trigger CGT?If the building is outside the business, then presumably you won’t qualify for ER.
The better option might have been to create a holding company sitting above the trading company, and moving the building into that.
Or sell the trading company, and then sell the building to your pension, before liquidating the holding company.
It would also be a related party transaction that therefore it would be "sensible" to get a formal valuation.
No idea what the CGT position is possible relief on transferring into a pension- would be interested to know. .
Firstly you need to seek advise from a qualified tax accountant so that all aspects of the potential sale of the business and any related property can be dealt with properly. A lot of tax reliefs can be reliant on small details for which they will need the full picture, or they maybe able to advise a more tax efficient way of structuring the sale.
However it sounds like the sale of the property may fall within 'Associated disposal' for entrepreneurs' relief if all conditions are met. See the link below for further details
https://www.gov.uk/government/publications/entrepr...
However it sounds like the sale of the property may fall within 'Associated disposal' for entrepreneurs' relief if all conditions are met. See the link below for further details
https://www.gov.uk/government/publications/entrepr...
Dont walk said:
Firstly you need to seek advise from a qualified tax accountant so that all aspects of the potential sale of the business and any related property can be dealt with properly. A lot of tax reliefs can be reliant on small details for which they will need the full picture, or they maybe able to advise a more tax efficient way of structuring the sale.
However it sounds like the sale of the property may fall within 'Associated disposal' for entrepreneurs' relief if all conditions are met. See the link below for further details
https://www.gov.uk/government/publications/entrepr...
He’s charging rent for the property so relief for associated disposals is limited, and only available to the extent that less than market rent is paid by the business. However it sounds like the sale of the property may fall within 'Associated disposal' for entrepreneurs' relief if all conditions are met. See the link below for further details
https://www.gov.uk/government/publications/entrepr...
https://www.legislation.gov.uk/ukpga/1992/12/secti...
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