Many businesses have been affected by COVID, this means that they have transferred their business or their business interest to another business or individual.
You may not be aware but there are 4 tax reliefs that a business can claim when a business or business interest or asset is transferred. These are: entrepreneurs’ relief, incorporation relief, gift hold-over relief and business asset rollover relief. These will be discussed in this post.
What is a tax relief?
A tax relief is simply a reduction in the amount of tax that is owed.
If we first consider what entrepreneurs’ relief is;
An Entrepreneurs’ Relief reduces the quantity of capital gains tax that can be imposed when a business asset is sold. Capital gains is the difference between the amount an asset was bought for and the amount of which it was disposed of (sold). The basic rate of tax upon the capital gains is 10% whereas the higher capital gains tax rate is 28%.
There is a limit of how much entrepreneurs’ relief that can be claimed. The limit has been set at £10 million. If the limit is surpassed then the additional capital gains shall be taxed at either the basic capital gains tax (18%) or at the higher rate (28%).
Remember! Entrepreneurs’ relief can only be claimed by individuals and some trustees of settlements. This relief is not available to companies.
TIP! Before applying for this relief you should check that the disposals you are applying for qualify for the relief, these are;
- Business assets sold as a part of an overall disposal of a trade or a partnership which includes business premises but excludes investment assets
- Assets used in business or a partnership but being sold within 3 years after the time the business ceased to operate
- Shares or securities held in a personal company which must be sold whilst the company is a trading company or
- Assets sold that are associated with the claimant’s qualifying company
So what is incorporation relief?
Incorporating a business means the business has a legal entity of its own separate from its owners. Incorporating an existing business means transferring the business with all of its assets.
Incorporation relief simply means not paying capital gains tax when a business is transferred to a company in exchange for shares. Instead the capital gains tax is rolled over, so the tax is paid when the shares are sold.
But how does this relief work?
The relief works by reducing the base cost of the new shares by a proportion of the gain that arises from selling the old business and its assets.
The individual who wants to benefit from roll-over incorporation relief must:
- Be a sole trader or in a business partnership
- Transfer the business and all of its assets (except cash) in return for shares in the transferee company
Business Asset Rollover relief
This relief allows the owner of the business to delay paying capital gains tax when they sell some specific type of business assets provided that all or some of the proceeds from the sale is used to purchase new assets within 3 years of the sale. After buying the new assets, capital gains tax is then due if there is a gain from the original asset.
The relief is only applicable to specific type of business assets which includes:
- Land and buildings
- Fixed plant or machinery
TIP! Before applying for this relief ensure that you are eligible and qualify, the requirements are;
- Purchase the new assets within 3 years of selling the old assets
- The business of whose assets are sold must be trading at the time of the sale of old assets and new assets
- Use both the old and new assets in the business
Lastly, what is gift hold-over relief?
Gift Hold-Over Relief
If a business owner is giving their business or business interests away for free or selling them for less than they are worth then they do not have to pay capital gains tax under gift hold-over relief. Instead, the person who receives the business will pay capital gains tax if they ever decide to sell the business in the future.
If business assets are being gifted for free or being sold for less than they are worth then the following requirements must be met for gift hold-over relief to apply:
- The business owner is a sole trader or business partner and have at least 5% of the voting rights in a company
- Use the assets in the company
TIP! If the shares are being gifted for free or being sold for less than they are worth then ensure the following requirements are met;
- Shares must not be listed on any recognised stock exchange
- Shares are in the personal company
- The company’s main activity must be in trading.
TIP! If you are unsure about which relief you qualify for then get in touch with HMRC they can support you in your business or business asset transfer.