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01 April 2021
Disposal of shares in a trading company
What happens if the company ceases to be a trading company?
Other disposals qualifying for BADR
If I do not qualify for BADR, are there any other reliefs?
Governments recognise that encouraging people to start businesses and employ others is important for the economy, and that any charge to tax on disposal should be mitigated to recognise the years of work involved in building a business and the financial risk that people take in doing so.
This was the principle behind business asset disposal relief (BADR), formerly entrepreneurs' relief, when it was introduced in 2008 to replace the earlier business asset taper relief. Over the intervening years, its conditions have been toughened and the lifetime limit of capital gains able to qualify for the relief was reduced from £10 million to £1 million with effect from March 2020.
Nevertheless, to the extent that it continues to be available, BADR is a valuable tool for business owners to minimise the tax payable on the disposal of a business or an interest therein, reducing the rate of capital gains tax (CGT) on qualifying capital gains to just 10%.
However, if the individual disposes of other capital assets in the same tax year, the gains benefiting from BADR use up any remaining part of the disposer's basic rate band, forcing the other non-property gains to be taxed at 20%.
The requirements for claiming BADR for a sale of shares in a trading company are that there is a disposal by an individual (or in some cases trustees) of shares in a trading company of which the seller had been an employee or officer and in which they had owned at least 5% of the ordinary share capital, with the ability to exercise at least 5% of the voting rights, each for at least two years ending on the date of disposal.
The seller must also meet one or both of the following two tests throughout the relevant two-year holding period:
There may be some relief if the 5% shareholding is diluted by the further issue of shares – assuming that such issue was for commercial purposes.
For the proceeds test, there are three assumptions – namely, that:
There is also a provision designed to help business owners who, by an issue of new shares, would cease to be eligible for the relief. This allows the owner to determine the amount of gain that they had made on the period that they were entitled to the relief by a deemed disposal and reacquisition. The owner can then defer that gain until they actually dispose of the shares and thereby avoid incurring a 'dry' tax charge.
If a company ceases to be a trading company, BADR may still be available if the shares are sold within three years of the date on which the company ceases to trade.
Extra care must be taken if the disposal is not a third-party sale but the receipt of a capital distribution following the winding up of the company.
BADR may also be claimed (subject to the £1 million lifetime limit) for any of the following disposals, provided, again, that they are made by an individual (or trustees, in certain circumstances):
Where BADR is not available for a sale of shares, it may be worth considering investors' relief, a relatively underused relief that was introduced in 2016. This relief reduces the rate of tax to 10% on lifetime gains of up to £10 million.
Investors' relief is available on a disposal of ordinary shares in unlisted trading companies by individuals other than officers and employees, or trustees in certain circumstances, and is subject to a three-year ownership period.
The shares must have been issued on or after 17 March 2016. However, as with BADR, there are detailed conditions that must be satisfied to qualify for the relief.
Where appropriate, it may be worthwhile selling a substantial shareholding to an employee ownership trust (EOT). Such a disposal would not be subject to any capital gains tax but requires a range of other issues to be considered.
For further information on this topic please contact Elizabeth Small, Oliver Claridge or Nicole Aubin-Parvu at Forsters LLP by telephone (+44 20 7863 833) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Forsters LLP website can be accessed at www.forsters.co.uk.
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