Making the best of a BAD job – CGT options for business owners
CGT relief for business owner-managers has not gone completely but it has been severely reduced now that entrepreneurs’ relief has become the Business Asset Disposal, or BAD relief. This isn’t a new relief replacing the old ER; the relief has been renamed and reduced but it is still useful for many trading businesses. Now, however, many people need to consider other options before they dispose of their business or cease trading.
There has been one big change this year. From the date of the Budget, 11 March 2020, the lifetime allowance has been reduced from £10m to £1m. The relief rate is unchanged, a reduced CGT rate of 10% replacing the standard rate of 20% for any sole trader, member of a trading partnership, or individual whose ‘personal company’ has carried on a trade for at least two years.
Business Asset Disposal Relief (BADR) is still available for larger businesses, it is only the amount of relief that is restricted.
Options for the family business
The first thing to consider is who can take advantage of BADR but doesn’t already. If a business is solely and exclusively owned by one person, they can double the benefit of BADR by bringing their spouse into partnership with them, saving up to an extra £100,000 of CGT on eventual disposal.
The same idea can benefit any other family member who is involved in the business and their level of involvement doesn’t have to be full time or even meet any minimum time commitment criterion. So a spouse and child whose actual contribution to the business is minimal can still benefit from BADR if the ownership structure is set up correctly.
When a company is involved the minimum requirement to make a company a ‘personal company’ is ordinary shares entitling the holder to at least 5% of the ordinary share capital and voting power in a general meeting. The individual must also be an employee or officeholder but there is no minimum working time requirement.
Beyond BADR- deferring payment
In the past, the 10% Entrepreneurs’ Relief/Business Asset Disposal Relief rate encouraged business owners to pay CGT rather than use any of the legitimate ways of deferring their tax liabilities. For gains above the scope of BADR, these options become attractive again.
Incorporate a sole trader or partnership business
When a business is incorporated in exchange for shares incorporation relief can apply, meaning that if the company later sells the business it only pays corporation tax on the uplift in value after incorporation.
Imran started his computer programming business with nothing and now it is worth £5m. He is unmarried and has no children, so if he sold the business for cash he would be facing a CGT bill of £900k, not the £500k he would have paid if the lifetime limit had not been reduced.
But if he incorporates the business and then the company sells it for £6m the company will pay only £200k on that sale, i.e. 20% of the increase over the value of the business when he incorporated it. The company then has a much greater amount of cash available for reinvestment which doesn’t have to be used in a trade.
Another option that becomes open for a business held in a company is to take shares or securities from the buyer of the company and pay no CGT at the time of the takeover. Instead, tax only becomes payable as and when the owner comes to dispose of the replacement assets.
However, he may still be eligible for BADR on the later disposal.
Deferment through reinvestment in new business shares or assets.
A person who reinvests all the sale proceeds of the assets of their business in new business assets can claim roll-over relief and pay no CGT on the sale. This relief is reduced if all of the cash received is not reinvested, but it is still a very useful option to consider.
EIS deferral relief
Gains from any source can be invested in new companies that qualify for the Enterprise Investment Scheme (EIS). The upsides to this are income tax relief, CGT deferral, and exemption from CGT on future gains relief for losses on the shares. The downside is that gains are only deferred and these investments, in smaller, higher-risk trading companies are inherently risky, meaning that financial investment advice is essential.