Fancy a capital gains tax rate of less than 10%? Here’s how…

Friday, July 15, 2011 | Posted by: Mike Hyland
Categories: Personal, Protecting your wealth | Tags: tax, capital gains tax, CGT, Mike Hyland, taxpayers, savings, UK residents, Entrepreneurs' Relief, business owners, qualifying gains

When looking to sell a company there are three actions that a prudent owner can take to minimise his tax bill.

While the current rate of capital gains tax (CGT) of 28% for higher rate taxpayers (those earning more than £42,475 at current rates) is not high by historical standards, it still represents a significant burden for business owners looking to sell their business interests for a significant sum.

So what actions might the prudent owner take in order to minimise their tax bill on the sale of their company?

Structure to maximise Entrepreneurs’ Relief
From 6 April 2011, the 10% Entrepreneurs’ Relief rate of capital gains tax was extended to the first £10 million of qualifying gains. This means that ensuring the disposal of your business qualifies for Entrepreneurs’ Relief can lead to tax savings of up to £1.8 million per owner. 

In addition, this saving can potentially be doubled fairly easily with advance planning by transferring shares to a spouse at least 12 months prior to sale. However, there are various common pitfalls to navigate in order to secure the relief, which are discussed in my colleague Stuart Maggs’ recent post on Entrepreneurs’ Relief.

Leave the UK
Perhaps the most effective way to reduce the UK tax bill on the sale of your business (in fact, completely eliminate it) is to cease UK residency prior to the sale. Non-UK resident individuals are outside the scope of UK capital gains tax and therefore no UK tax will be due on the gain realised when selling the business.

However, clearly this will not fit everybody’s lifestyle, particularly given the fact that you would need to remain non-UK resident for at least five complete tax years to lock in the saving and, in addition, it can be very difficult to establish your non-UK residence in the first place. Any tax charges in the new country of residence would also need to be considered.

Less than 10% without leaving the country…
There are a number of planning possibilities available that could result in an effective capital gains tax rate of less than 10% without having to take drastic action like packing your bags and moving to a tax haven. These depend on your circumstances.

So, when you are thinking of selling up there are a range of things you can do to maximise the amount of the sale price that ends up in your pocket. As ever, it is best to seek advice in relation to your specific circumstances.

I am pleased to take questions about planning for a business exit and to hear your views.

You might also find these posts useful:

* Thinking of selling? Entrepreneurs’ Relief could save you up to £900,000 tax
* Clarity on UK tax residence?
* Retiring abroad could be more taxing than you think