Entrepreneurial Taxes and Tax Efficient Investments

Entrepreneurs’ Relief (ER) can reduce the rate of CGT from 20% to 10%.  Shares in a trading company may qualify for ER (subject to meeting the other qualifying conditions).  Usually, a minimum holding of 5% of the company (tested by nominal share capital and voting rights) is required before ER can apply.  These shares need to be held for a minimum of one year.  ER may also apply to shares acquired via an Enterprise Management Investment (EMI) option.  Typically, the EMI option would be exercised on a sale of the company, and to qualify for ER, the EMI option needs to be held for a minimum of one year. 

EIS and Venture Capital Trust (VCT) investments might also be attractive to those impacted by the lifetime, annual or tapered annual pension allowances. Whilst quite different to pensions in terms of investment structure, they do offer income tax relief as well as tax free dividends in respect of VCT and CGT deferral in respect of Enterprise Investment Scheme (EIS).

Company directors who require more income, or who may be concerned about cash building up in their company (e.g. this can cause issues for both CGT and IHT) could pay themselves a dividend, accepting the tax charge that follows.  A higher rate taxpaying individual may then reclaim nearly all of the tax paid on the dividend by way of an investment into a VCT, which offers an immediate 30% income tax relief.  The VCT investment would yield tax free income through the receipt of future dividends.

You could also look to invest in Business Property Relief (BPR) qualifying investments which provides relief from IHT after 2 years of ownership.  Once the assets qualify for BPR, there are further tax planning opportunities available.

Top tip:

It is common for spouses to hold shares in the same company.  One spouse might, for example, hold 6% of the company’s shares (and voting rights), with the other holding 2%.  It would not be possible for both to obtain ER on the sale of shares.  In this case, it may be beneficial for the spouse holding 2% of the shares to transfer their holding to the other spouse.  The other spouse’s 8% holding would qualify immediately for ER (assuming all other conditions are satisfied).  There would be no need to wait one year for the 2% holding to qualify for ER. 

There is a lifetime limit of £10 million on ER qualifying gains.  Each individual has this allowance.  If there is a substantial gain likely, giving shares to your spouse in advance (i.e. more than 12 months) of a sale could double the ER allowance to £20 million per couple.

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