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I am a director of a UK Ltd company owning 31% of the shares,

Resolved Question:

I am a director of a UK Ltd company owning 31% of the shares, if i want to sell this entire shareholding would i qualify for the entrepreneur discount rate of 10% on CGT?
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi
Thanks for your question. I am Sam and I am one of the UK tax experts here on Just Answer.
As long as
1. You have more than 5% shares and voting rights - which you seem to indicate you do
2. You have owned the business (part share) for at least one year
3. You were a director of the company - which you are
4. The companies main activity is a trading activity rather than non trading (such as investment)
if you fulfil all these criteria then you have a claim against the permitted £10,000.000 lifetime of relief.
You then deduct the annual exemption of £11,000 (this years exemption allowance) and the remaining gain is liable to 10% entrepreneurs relief.
You make a claim against the relevant year self assessment tax return on the sale - on Section A of the Entrepreneur relief section.
let me know if you have any follow up questions on the information provided.
Thanks
Sam
5.
Customer: replied 2 years ago.

Thank you for your answer.

I qualify all of those 4 points you have listed, the company is a consultancy firm. I have one more question related to this:

The prospective buyer wants to have an earn-out period whereby they will pay up-front approx 80% of the purchase price, but the remaining 20% is paid out over a three year period in equal parts, subjected to a formula to decide whether the amount paid goes up or down (from the remaining 20%).

How would these deferred payments be treated and how can I ensure that they are treated equally under the same tax (CGT) rule - because these payments would still be part of the same sale.

By the way the total price for 100% of the share sale is just less than £3M so we are far away from the £10M lifetime limit.

Thank you David

Expert:  Sam replied 2 years ago.
Hi David
Thanks for your response
I am pleased that you fulfil all the criteria, that's some worthwhile savings to be made rather than suffer 18% and/or 28% capital gains tax.
The capital gain is usually determined at the point of sale (so you will be considered on 100% of the sale, even though 80% of the shares have been paid for)
If in fact you mean that 80% of the 31% will be sold initially and then the remaining 20% actually purchased over the next 3 years, then you have a problem - a these will be treated as separate transactions and only the sale in year one will meet the 5% remit and be within a year of you no longer working/being a director of the company, so the stand alone sale in Year 2 and 3 will then be subject to normal capital gains rate.
So just ensures that the contracts state 100% sold, with 80% bought now and the final 20% paid for over the set periods you have agreed (with the appropriate formula!)
But note, this way, you will be considered for capital gains on the sale price of the full 100% at the point of the first sale being completed.
Let me know if you have any follow up questions, but, it would be appreciated, if you could take the trouble to rate the level of service I have provided (or click accept) as this ensures that I credited, by Just Answer, for my time.
Thanks
Sam
Customer: replied 2 years ago.

Perhaps I was not clear, sorry.

They are proposing to buy 100% of the shares on day one, however the money will arrive in four parts!

First part : 80% on the day of the signatures of the sale agreement

Second / third / fourth parts total 20% - to be paid over three year period; one year / two years and three years after the date of the first 80%.

It seems to be a standard procedure for our type of company (the buyer keeps some money back to encourage the business to continue to flourish with help of the the original owners working for what is called an "earn-out" period.

So just to clarify, if the sale price is £3M and my share is 31% i would be expected to pay a CGT of 10% on £930,000 - so £93k paid in the tax year that the sale occurs. Do you agree?

Expert:  Sam replied 2 years ago.
Hi David
Then that is fine, that is why I covered both scenarios, so it was clear what HMRC would treat as one transaction (and cover under the entrepreneurial relief) or whether they would view each of the four transactions as such.
So whilst you will not get 80% of the money on the day of the sale agreement you will be liable to tax as if 100% of the money had changed hands, and then will need to apply to HMRC to amend the figure , if the amount paid for part 2, then 4 then 4 is less than the total amount HMRC have charged you on.
But entrepreneurs relief will continue to apply on these amended figures.
The figure of capital gains would be £930,000 less costs to sell - (such as legal fees) then less £11,000 annual exemption allowance, leaving approx. £915,000 x 10% = £91,500 to pay.
Thanks
Sam
Sam, Accountant
Category: Tax
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