Where you personally own the premises your business trades from, it has historically always been considered sensible to charge rent to avoid national insurance. However, on ultimate exit from the business there may be a tax issue on entrepreneurs’ relief. This is only a problem if the sale of the business itself does not generate a gain of at least £1 million.

You can claim relief on the sale of the business premises if this is linked to a sale of the business, but if full rent has been charged on the property, no relief is due.

The good news is that rents received prior to April 2008 can be ignored.

Furthermore, if full market rent has not been charged, relief is still allowed but in proportion to the discount from market rent. If this is likely to be an issue, this may be a good time to review the position.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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Looking at the newspapers recently - broadsheet, as well as tabloid - you could be forgiven for thinking that any attempt to reduce your tax bill is considered a crime and should be subject to heinous penalties.

I have news for you - IT'S NOT!

A long time ago, way back in 1936, Lord Tomlin stated (IRC v Duke of Westminster) that every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

That made perfect sense then - and it still does. You are not obliged to arrange your private or business affairs to maximise the tax take to the Government. That's not to say you shouldn't follow the rules.

Does the law permit a company to set up a subsidiary in a low-tax jurisdiction and generate profits with a lower rate than in the UK? Yes, it does. At worst, you may have to bring the profits back after two years, but if the profits are high enough, that deferment can be worth having. Is it permissible to remortgage a let property and obtain relief for the interest against the rents - whatever you spend the money on? Yes it can be. Is it legal to rearrange shareholdings so within a couple both may obtain the £80,000 benefit of entrepreneurs relief? Of course it is! I could go on, but you probably get the picture.

It is commercially sensible not to pay more tax than you are legally obliged to do so and I for one do not feel guilty about planning to ensure this is the case. When I want to help out a needy cause, I choose to give my spare cash to charity, not the Chancellor - and I make sure I claim gift aid relief when I do!

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Under the draft legislation there appears to be a problem for shareholders in companies or groups participating in joint ventures. Activity carried on with a view to acquiring an interest of 10% or more in a joint venture company is trading activity under the legislation but actually holding shares in a joint venture company appears not to be. This means that a company or group can fail the trading tests if the shareholding in the joint venture is substantial in relation to the overall activity.

If this were to be the case, entrepreneurs relief would not be available.

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In order for an employee or director of a company to benefit from the new Entrepreneurs’ Relief after 5 April 2008, he or she must have held more than 5% of the company’s ordinary shares for at least twelve months. But it will not be necessary to have held all of the shares being sold throughout the period, as one of the Revenue’s FAQs makes clear:

Q - I already hold over 10% of the shares in the company. If I acquire another 4% of the shares and sell the whole 14% 6 months later, can I get entrepreneur’s relief on the whole 14%, or only on the 10% I held for the whole of the one year qualifying period?
A - Relief will be available in respect of the whole 14% holding if the qualifying conditions are met. The requirement is that a 5% stake is held throughout the qualifying period. The particular shares or securities disposed of do not have to be held throughout that period.

www.hmrc.gov.uk/cgt/entre-faqs.htm

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There has been a great deal of concern, since Alistair Darling’s announcement that taper relief would be abolished from 6 April 2008, that people holding loan notes after selling their business would face an 18% tax rate, rather than the 10% they had expected at the time they sold the business.

The Revenue have just released draft legislation on the proposed Entrepreneurs’ Relief, together with answers to a number of frequently asked questions. Within the latter, they have confirmed that, if the original disposal would have met the conditions for Entrepreneurs’ Relief (e.g. 5% ordinary shareholding, carrying 5% of the votes, owned by a director or employee, or a business interest held for at least one year prior to the sale), the encashment of the loan notes will do, too.

This applies only if the loan notes are “Qualifying Corporate Bonds” (which most are) but will be a welcome relief to many former business owners.

If you would like to discuss whether you might be affected, please contact Cathy Corns or me.

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Anyone who has exchanged shares for non-qualifying corporate bonds (or non-QCBs, for short) needs to review their position carefully – before 5 April 2008.

Unless, in addition to the non-QCBs, they meet the criteria for the new Entrepreneurs’ Relief (e.g. they have been employed by the company that issued the loan notes and have owned at least 5% of the company’s ordinary shares throughout the twelve months prior to encashing the loan notes) they will face an 18% capital gains tax bill, rather than the 10% they might have expected when exchanging their shares.

It may be possible to benefit from the lower rate – but only by acting well in advance of the change.
If you think you might be affected by this and would like to discuss what you can do to keep your tax bill down, please contact Cathy Corns or me.

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Anyone thinking of exchanging shares in their trading company from loan notes in another company after 5 April 2008, will need to be very careful about which type of loan note they accept.

The rules are involved and every circumstance will differ.

If you would like to know more, please get in touch with Cathy Corns or me.

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Someone “selling” their company by taking shares in the acquiring company may be in for a nasty surprise after 5 April 2008.

The new Entrepreneurs’ Relief, which comes into effect on 6 April, will reduce the capital gains tax due on selling shares from 18% to 10% only if the vendor:

• worked for the company; and 
• owned at least 5% of the ordinary shares in that company, carrying at least 5% of the votes, throughout the twelve months leading up to the sale.

Our experience is that these two criteria are often not met, either because the vendor does not work for the new company or because he holds less than 5% of its ordinary shares.

If you are likely to be affected by the new rules (including situations where the exchange has already happened) and would like to discuss what might be done to improve your position, please contact Cathy Corns or me.

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The Revenue have confirmed that the £1 million “lifetime limit” for capital gains qualifying for the new Entrepreneurs’ Relief will apply only to gains made after 5 April 2008.

Official confirmation to anyone born in April 1968 that life really does begin at forty.

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The new Entrepreneurs’ Relief, which comes into play from 6 April 2008, will (subject to certain criteria) reduce the capital gains tax due when shares in trading companies – or business interests – are sold.

It will not, however, be available where business assets are sold in isolation, rather than as part of the disposal of a business. This would include, for example, the sale of land owned and used by a farmer, unless the sale could be argued to be of a distinct business.

This is likely to be an area of debate with the Revenue and, in many cases, might only be settled by the Courts.

If you would like to discuss how this might affect you – and whether there is anything you can do to avoid this hike in the tax likely to be due – please contact Cathy Corns or me.

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As you are only too well aware by now, the Chancellor announced a major reform of the capital gains tax (CGT) regime by setting a single flat rate of 18% from April 2008. Following a major outcry, the new entrepreneurs’ relief has been announced; this relief will reduce gains liable to CGT by 4/9ths, resulting in an effective rate of 10% on gains of up to £1m on disposals of a business by an individual.

But while business owners may be relieved by the introduction of a 10% rate of CGT on the first £1m of gain, their employees are likely to be far less happy as holdings of less than 5% will not qualify for relief.

The Government have encouraged companies to reward and motivate employees with shares but now exclude such employees from the new entrepreneurs’ relief.

There must be some logic – my problem is I just can’t see it!

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Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.

It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.

In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.

You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.

If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.

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The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.

Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.

Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.

It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.

If you would like to discuss what might be possible, please contact Cathy Corns or me.

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As we reported last week, Alistair Darling has released details of what he and HM Revenue & Customs are calling “Entrepreneurs’ Relief” (which probably sounds better than the U-turn that many consider it to be).

Under this new relief, which is set to become law from 6 April 2008, the self-employed, employees and directors will qualify for a 10% tax rate on selling their interest in the trading business or company for which they work.

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