Entrepreneurs Relief – Planning Required

If you are thinking about disposing of the shares in your own company then make sure you plan ahead to ensure you meet all of the criteria for Entrepreneurs Relief.

Entrepreneurs Relief reduces the Capital Gains Tax on certain gains from 28% or 18% to 10% but all of the relevant conditions must be met for the gain to qualify.

In this scenario, for the 12 months up to the disposal of the shares:
1. The company must be a trading company
2. You must hold 5% or more of the shares in the company
3. You must be an employee or officer of the company

The first of these conditions – a trading company – means a company whose activities do not include to a substantial extent activities other than trading activities.

If you have amassed a large cash balance in the company bank accounts this could be considered to be an investment activity rather than a trading activity and could therefore leave you open to a challenge by HMRC over whether Entrepreneurs Relief is due on the gain.

Careful planning is required in advance.