A key relief for business sales

JAMES SKELLORN of Barker Gotelee highlights the importance of having the correct business structure when claiming Entrepreneurs’ Relief

WHEN you are selling your business or an asset used in your business, the key tax is Capital Gains Tax.

A big message from the Budget is that Entrepreneurs’ Relief continues to grow in importance as the key relief when the great day comes to sell your business or to sell a major asset used in the business.

When Entrepreneurs’ Relief was originally introduced a couple of years ago, the lifetime limit for gains which could get relief was �500,000.

This has been rapidly increased and the most recent Budget increased the lifetime limit from �5million to �10m. This means the maximum tax saving that this relief can give you is �1.8m.

The effect of the relief is to reduce the rate of Capital Gains Tax where entrepreneurs’ relief applies from 18% or 28% to 10%. The catch is that your business must be structured correctly to get the relief.

To get maximum relief, the shareholdings must be correctly distributed throughout the family.

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The partnership has to be structured correctly with the right assets on or off the balance sheet and if you protect family capital using a trust, the trust has to be built into the business correctly to achieve relief.

The structure has to be correct for a year before the sale so it is essential to involve your tax adviser well in advance of the sale to get things right.

If you are not going to use roll-over relief to reinvest the proceeds of sale into new business assets, then Entrepreneurs’ Relief becomes vital.

n An unexpected change in the Budget is the tax treatment of income from mineral extraction. Many landowners in Suffolk benefit from mineral extraction from their land.

Income (royalties) received by the landowner for the extraction of minerals from their land is an unusual source of revenue because it involves physically selling part of the structure of the land and once the minerals have been extracted, they cannot be replaced.

The tax systems recognise this by taxing part of the royalties as capital and part as income. In general, capital disposals are taxed at a lower rate than income.

The Chancellor announced in the Budget that as from 2012 all of the royalties from mineral extraction will be taxed as income. On the whole this is bad news for landowners with minerals under their land.

It also seems to go against the advice given to the Government by the Office of Tax Simplification.

However, because this tax change does not come into effect immediately, there will be time for consultation and so there is an opportunity for your voice to be heard on this issue, probably in the Autumn of 2011.