CGT Entrepreneur relief

Hi,

I founded a company in 2015 I remained in full time employment with it until 2019 when I left but remained Chairman until 2021. Over the past 10 years the company has had multiple investments and share dilutions culminating with a sale this year where my shareholding was 2.1%.

I was wondering if I qualified for the Entrepreneur Relief?

It sounds as if the circumstances of this case are very specific and you will need specialist tax advice.

It would have been better to get this tax advice before the transaction.

Did the Corporate Finance advisors who advised on the sale not explain the implications?

But based on the very limited information you have provided, it would appear that you do not qualify.

Conditions of the relief​

Where a business is carried on by a company, individuals seeking to qualify for the relief must own not less than 5% of the shares in the qualifying company or 5% of the shares in a holding company of a qualifying group. A holding company means a company whose business consists wholly or mainly of the holding of shares of all companies which are its 51% subsidiaries. A qualifying group means a group where the business of each 51% subsidiary (other than a holding company) consists wholly or mainly of carrying on a qualifying business.

The individual must have been a director or employee of the qualifying company (or companies in a qualifying group) who is or was required to spend not less than 50% of his or her time in the service of the company or companies in a managerial or technical capacity and has served in that capacity for a continuous period of three years in the five years immediately prior to the disposal of the chargeable business assets.

Hi -

Thanks for the quick reply. At the time of the sale I merely had a shareholding in the company and was neither an employee nor a director so had no input into the sale.

Plumbit said:

I was wondering if I qualified for the Entrepreneur Relief?

Click to expand...

You haven't mentioned what the company does. That's the starting point.

We'll presume it meets the 'Qualifying Business' condition i.e. a business other than the holding of securities or other assets as investments; the holding of development land, or the development or letting of land.

The fact that you held less than 5% at the time of disposal shouldn't disqualify you from the relief.

The requirement for an individual to have owned a holding of at least 5% of the ordinary share capital for a continuous period of 3 years in the 5 years immediately prior to the disposal was amended by section 24 Finance Act 2020, so that the shares can qualify for relief if they were held for a continuous period of 3 years at any time prior to the disposal of those shares. If you held at least 5% of the ordinary share capital for 3 years you will be regarded as a relevant individual and the shares will be 'chargeable business assets'. The subsequent dilutions down to 2.1% shouldn't matter if you had 5% for 3 years at any point.

What's considered 5%? It is unclear from the legislation whether the 5% threshold should be calculated by reference to the nominal value of shares or the number of shares in issue; however, Revenue guidance clarifies that “it is the nominal value of the ordinary shares issued rather than the number of such shares that is relevant” in paragraph 2b.4 of the Tax & Duty Manual on Entrepreneur Relief.

However, the 'Qualifying Person' condition could trip you up here i.e. the requirement to spend not less than 50% of your working time in the service of the company in a managerial or technical capacity, and served in that capacity for a continuous period of 3 yrs in the 5-yr period immediately prior to the disposal. Based on the info provided, this condition may not be met but as I've hopefully given you a glimpse at the complexities of the relief, specialist advice would be no harm.

thanks for that. The company definitely qualifies (as a software company) and I know I qualify for the 5% holding . It’s the Qualifying Person that concerned me. It seems fairly harsh that the employment had to be in the last 5 years given the high risk of an entrepreneurial enterprise is in the starting and early years of a startup .

were you working in a managerial or technical capacity for 50% of your time for 3 of the 5 years before the sale?