October 30th, 2012 / Insight posted in

Capital gains tax can be cut to 10%

IA writes: I want to take advantage of entrepreneurs’ relief in the future so that, on amounts up to £10m, I will pay only 10% tax. My interests are in internet businesses. Would it be better for me to set up a limited company for each internet business I have to take advantage of this relief? Can you also tell me how much of the company I have to own and for how long?

The £10m limit for entrepreneurs’ relief is a lifetime limit for individuals rather than an annual or per company limit, and the relief reduces their rate of capital gains tax for certain disposals from 28% to 10%, writes Jon Sutcliffe, partner at Kingston Smith LLP. Once your qualifying gains exceed the lifetime allowance, the excess will be chargeable at your capital gains tax rate, which is currently 18% or 28%.

As with most tax reliefs, there are qualifying conditions to be met. You will need to have held the business asset for at least one year before the asset is sold or before the date on which the business ceased to qualify.

Assets that qualify are tightly defined, but include shares in a “personal company”. This is a company in which you hold at least 5% of the ordinary share capital and voting rights and have done so for the qualifying period, and you are an officer or employee of the company or group and have been so for the qualifying period. The company needs to be a trading company or the holding company of a trading group.

To take advantage of entrepreneurs’ relief you will need to be disposing of a business asset personally, though it can also apply to trusts in limited circumstances.

So you could put each of your internet businesses in a separate limited company. This would crystallise a gain on which you could take advantage of entrepreneurs’ relief, but would also create an entity that can raise equity and ultimately be sold independently of your other businesses.