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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Can i claim entrepreneurs relief on selling my sole trader

Resolved Question:

can i claim entrepreneurs relief on selling my sole trader business to my own limited company
Submitted: 9 months ago.
Category: Tax
Expert:  TonyTax replied 9 months ago.

Hi.

Where you dispose of business assets on or after 3 December 2014 to a close company in which you are a participator you cannot claim entrepreneurs' relief on the gain from the sale of the goodwill of the business. You can claim ER on the disposal of other business assets. Take a look under the heading "Disposal of goodwill of your business" in HS275 here. The definitions of a close company and a participator can be found here.

If you incorporate your business you can defer any CGT charge until a disposal of the new business by claiming incorporation relief. Look here for more information.

I hope this helps but let me know if you have any further questions.

Customer: replied 9 months ago.
I am a sole trading financial adviser and I am considering transfer my business to a limited company (not established as yet). I generate ongoing commissions and fees say £100,000 per annum, these are continuing monthly or annual payments which if sold to a competitor they would typically pay between 3 to 4 times the annual amount. Is this sum treated as a usiness asset and can I therefore claim ER?
Expert:  TonyTax replied 9 months ago.

The 3 to 4 times the annual fees would be the value of the goodwill and you cannot claim ER on that by transferring it to your own company. In order to avoid paying CGT, you would claim incorporation relief.

Customer: replied 9 months ago.
just to clarify, If I sold my business to my limited company for say £400,000 I would be subject to CGT at 28% on the whole amount (as I started from scratch with no value), but I can defer payment of the CGT by claiming incorporation relief. If I sold the business instead to a competitor, which I have no connect or association with, I can claim ER. Is that correct?
Expert:  TonyTax replied 9 months ago.

That's all correct apart from the CGT rate. From 6 April 2016, there are new CGT rates for non-residential property gains of 10% and 20% as you can see here.

Customer: replied 9 months ago.
Thank you. Just a few further questions, One of main reasons for transferring to a limited company is so that I can expand the business in the most cost effective and tax efficient manner. The idea is that the sale price will be owed to me by the Ltd Co, since it will have no assets on incorporation. As a director of the company I will then take part of my remuneration over a number of years as directors loan repayments and have no personal income tax to pay, or national insurance contributions. I assume that this is an acceptable practise? With regard to the incorporation relief, if the tax on a £400,000 sale price is calculated at say £80,000, which is 20%, when I subsequently sell the business in 10 years time to an unconnected business for £1,000,000, what would be the total tax to payable assuming I am a higher rate tax payer and that all tax rates remain unaltered?
Expert:  TonyTax replied 9 months ago.

Drawing down on a director's loan account is acceptable practise.

When you claim incorporation relief, you defer the CGT charge. See the first example here. If you defer a gain of £400,000, the cost of the shares (£400,000) you sell in the future is reduced by the deferred gain, £400,000 in your case. So, at 20%, your CGT would be £200,000.

Expert:  TonyTax replied 9 months ago.

You would probably be able to claim ER on the sale of your shares so you would pay CGT at 10%, £100,000 (£1,000,000 - (£400,0000 - £400,000) @ 10%).

Customer: replied 9 months ago.
I'm struggling a bit to understand this. If I decided not to defer the gain I would pay £80,000 tax now. If I subsequently sold the shares in the future for £1,000,000 and I qualify for ER I would pay £100,000 (based at 10%), do I have this part right? Now, if instead I defer the gain of £400,000 and sell the shares at £1,000,000, the gain is deemed to be £1,000,000 so at 20% £200,000 is payable. But I also have ER of £100,000 to pay which equates to £300,000 in total. Is that correct?
Expert:  TonyTax replied 9 months ago.

The gain is only deferred. It does not go away. The cost of the shares in the new company is reduced by the deferred gain.

If you don't defer the gain, you will pay CGT on £400,000 at 20%, £80,000. The cost of the shares will be £400,000 so if you sell them for £1,000,000 you will make a gain of £600,000 on which you will pay CGT at 10% (£60,000) if you do qualify for ER or at 20% (£120,000) if you don't qualify for ER.

If you defer the £400,000 gain and sell the shares for £1,000,000, they will have £0 cost and if you don't qualify for ER, you will pay CGT at 20% or £200,000.

If you defer the £400,000 gain and sell the shares for £1,000,000, they will have £0 cost and if you do qualify for ER, you will pay CGT at 10% (the ER rate) or £100,000.

Customer: replied 9 months ago.
I've got it now. So finally, assuming the rules stay exactly as they are (unlikely I know), and based on the example I have described, it makes sense to opt for incorporation relief since; 1) I don't have to find the tax now; 2) The overall tax I will pay on final disposal will be £100,000 lower (via ER); and 3) I will benefit from the effects of inflation on the deferred amount. Of course I realise that in the meantime rates of tax and reliefs may change. Have I got these final points correct? Many thanks
Expert:  TonyTax replied 9 months ago.

Yes, you have.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15838
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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Customer: replied 9 months ago.
Many thanks for your assistance. It is most appreciated.
Expert:  TonyTax replied 9 months ago.

Thanks.

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