For business owners with an imminent sale or planned sale over the next few years, the Budget may well be a cause for concern. The Conservative party has pledged to review and reform Entrepreneur’s Relief (ER). It is widely speculated that the rules may be tightened - or axed altogether. Will all gains be taxed at the standard rate of 20%? Will the rate of CGT increase?
No-one can yet answer these questions, but we can see merit in considering using ER while we still have it by engineering a disposal for CGT; this is possible even if your business sale is not at an advanced stage.
ER can be claimed by transferring your business interest to a ‘settlor-interested trust’. This involves you, as the owner, establishing a trust for the benefit of your family (including yourself) and then transferring your interest into the trust. As a transfer to the trust is a disposal for CGT purposes, it will allow you to claim ER under the current rules if the business interest qualifies. The business interest will then be re-based for CGT, and any subsequent sale to a third party will not trigger tax on the same gain: only gain going forward will be taxed.
In summary, you would be giving away your business interest to a family trust to trigger CGT and allow the ER to be claimed rather than risk new rules after the Budget.
It sounds too good to be true, to guarantee 10% CGT now. However, the elephant in the room is the need to pay the CGT possibly before your business sale to a third party has concluded.
The timing of the CGT payment will be a key consideration.: payment is due on the 31 January following the end of tax year of sale, so a disposal to a family trust before 6 April 2020 would result in a CGT bill by 31 January 2021. It would be necessary to have a fall back situation to cover the tax payable should the business sale not complete in time.
Entrepreneurs by their very nature may be prepared to take some risk: on a business sale with a £10m gain, this gamble could save £1m in tax. If the plan is to sell the business at some point in the future then tax is a given in any event, so paying now at a lower rate makes a lot of sense. After all, the tax saving may more than justify financing the arrangement regardless of any business sale.