People who run a business as a limited liability company can be thousands of pounds worse off compared to those who operate as a partnership or limited liability partnership (LLP) company, when they come to retire or sell up.
“Given that many entrepreneurial businesses and consultancies are structured as a limited liability company rather than a partnership or LLP, this is of major importance and the law needs reform. The Budget gives the Chancellor the perfect opportunity to put these businesses on an equal footing and support our enterprise economy,” said Richard Mannion, national tax director at Smith & Williamson, the accountancy and investment management group.
The current situation means that people who have spent years building up a business may end up with no little or no tax relief on disposal as the tax rules contain massive traps for the unwary.
Broadly, to qualify for entrepreneurs' relief on sale of assets (ie a special CGT rate of 10%, rather than the standard rate of CGT at 28%, on the uplift in value), individuals who invest in a company must own 5% of the total shares and have been an employee or office holder (director, company secretary or similar) for the year prior to sale.
"So an individual who has been a director for many years but who retires a short time before they actually dispose of their shares will not qualify for relief,” explained Richard.
In contrast, a sleeping partner in a non-incorporated business may never have worked in an organisation at all, but have provided start-up capital. When that person sells their investment they automatically qualify for the 10% rate even if they have never actually worked in the business.
Richard concludes: "Put simply, entrepreneurs' relief treats those who have invested in a company differently to those who have invested in a partnership or LLP. As a result, a person who has invested in a company could be at a massive disadvantage when it comes to selling their share of the business. I do not believe that this is what the government intended when the rules were introduced. Now they need to sort it out.”
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