Entrepreneurs’ Relief, or rather Business Asset Disposal Relief (“BADR”) as it is now known, has seemingly long been the focus of government scrutiny, having been labelled “expensive, ineffective and unfair” and failing to fulfil its purpose of encouraging investment and growth of new business. To tackle this perception, the Spring Budget saw the Chancellor cut the lifetime limit dramatically for disposals made on or after 11 March 2020, from £10 million to just £1 million. Yet BADR is not out of the spotlight yet, with its future still the subject of much speculation, particularly given the likelihood of impending tax increases in the wake of the current Coronavirus pandemic.
However, for as long as BADR does exist, it is a relief worth having, taxing qualifying gains up to the lifetime limit at just 10%. With a two year qualifying period, either up to the date of the disposal or the date of cessation of your business, if you are planning an exit in the not too distant future, it is important to ensure that your business ownership is structured so as to make certain the qualifying criteria are met.
If you run your business through a limited company, in order for a sale of shares to qualify for BADR, the company must either be trading or be the holding company of a trading group; you must be an employee or officer of the company; and the company must be your “personal company”. This means that you must hold 5% of the company’s ordinary share capital and by virtue of that holding, 5% of the voting rights, AND an entitlement to at least 5% of either:
- Profits available for distribution and distributable assets available on a winding-up; OR
- Proceeds in an eventual sale.
But what if a trade sale of your business is just not a realistic prospect in the current climate? With the uncertainty of COVID-19 causing disruption to world markets and the Corporate Finance sector experiencing unprecedented difficulties, is there an alternative to finding a buyer for your business on the open market? At Ensors, we have seen increased interest in Management Buyouts (“MBOs”) and Employee Ownership Trusts (“EOTs”) as a controlled method of exit where companies already have a strong management team of key individuals in place below the current business owners.
EOTs in particular, with their headline grabbing tax breaks and a cultural shift toward the ‘John Lewis model’ of focussing on the long-term benefit of employees, have become increasingly popular as a way of ensuring the right succession is in place.
If the qualifying criteria are met, a disposal of a controlling interest in a company to an EOT can be made completely free of Capital Gains Tax, plus once the company is owned by an EOT, it is able to pay ‘income-tax’ free bonuses to employees of up to £3,600 per year each.
If you are thinking about an exit from your business and wish to ensure that its long-term future is secured, please speak to a member of the Business and Corporate Tax Team to discuss the options available to you.
