Monthly Tax Idea – October 2011

Company takeovers – locking into a 10% tax rate for minority shareholders

The rate of capital gains tax (CGT) on most gains is 28%. One very valuable exception is the 10% rate on gains arising on disposal of shares in trading companies and groups which qualify for ‘entrepreneurs’ relief’. Everyone has a lifetime limit of up to £10 million of gains at this rate, giving a maximum cash tax saving of £1.8 million.

Several conditions have to be met to qualify for entrepreneurs’ relief. One is to have held 5% or more of the ordinary shares for at least a year before the disposal. Another is for the individual to work as an officer or employee of the company.

A common situation is where key members of staff have been awarded share options, which are then exercised less than 12 months before the sale of the company. In these or similar circumstances the employee may well be facing a sizeable tax bill as they will not qualify for entrepreneurs’ relief on the sale of their shares. 

Where the employee’s shareholding is at least 5%, then provided the employment will continue after the change in ownership (including in another member of the purchaser’s group), it may still be possible to benefit from entrepreneurs’ relief, despite selling the shares to the purchaser.  However, this requires advance planning and the cooperation of the purchaser and so needs to be included at an early stage in any sale negotiations – the earlier the better, ideally when negotiations commence.

Others who could find this planning suitable include those who have been gifted shares prior to the proposed sale and are officers or employees in the company.