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Loan Notes – A Seller’s Dilemma
When you sell your company your buyer may wish to pay part in cash and part in loan notes to be paid off from future profits. The Loan Notes are known as Qualifying Corporate Bonds (QCB’s), the dilemma is whether to claim Entrepreneurs Tax at 10% now or pay full Capital Gains Tax later.
To obtain Entrepreneurs’ Relief on a disposal of the shares (the “old asset”) at the time of the exchange, the individual may make an election for the gain not to be deferred by TCGA92/S116 (10). The effect of an election is that the gain is brought into charge at the time of the exchange so that Entrepreneurs’ Relief can be claimed in order to benefit from the 10% rate – TCGA92/S169R (2).
In the absence of an election the gain is deferred and will be charged to CGT when it accrues under TCGA92/S116 (10) (b). It would be unusual for the qualifying conditions for Entrepreneurs’ Relief to be met at the later date when the gain comes into charge.
An election under this section, like the claim for Entrepreneurs’ Relief, must be made on or before the first anniversary of the 31 January following the tax year in which the relevant transaction takes place – TCGA92/S169R (4).
So would you claim the Entrepreneurs Tax Relief and pay 10% now or possibly pay 28% later?
You could try selling your shares in stages but that might not suit either you or your buyer?
steve@bicknells.net
5 Pitfalls to avoid with Entrepreneurs Tax Relief
If you sell or close your business, you may be able to claim Entrepreneurs’ Relief – this means that you only pay 10% Capital Gains Tax on any qualifying profits.
There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.
Companies
To claim Entrepreneurs’ Relief you must:
- own at least 5% of the shares in the business for a year
- be a director, partner or employee of the business
Sole traders
To claim Entrepreneurs’ Relief you must have been trading for at least a year.
Full details are on the HMRC Helpsheet HS275
But here are some pitfalls to avoid…….
- Entrepreneurs Tax Relief is not available to companies, so if your company sold the part of its business then that won’t qualify, it’s common for a buyer to want to buy the assets into a New Co but ask that the old company remains alive in case of future claim.
- Significant Non Trading Activity could be a problem too, some business contain investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business
- Less than 5% share ownership this can be an issue where share options are granted and exercised before a sale
- Voting rights of classes of shares or when at an AGM votes are based on a show of hands
- Shares transferred to a non working spouse prior to sale to save tax – to qualify you have to be an employee/officer and hold the shares for a year
steve@bicknells.net
Business Accountant 