Entrepreneurs' relief

For corporate deals the abolition of taper relief has rewritten the rules of the game.?For individuals and trusts there is now a single CGT rate of 18%. The nature of the asset and how long it has been owned do not matter any more.

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However, entrepreneurs' relief allows the first ?1m of gains to be taxed at just 10%, and already this relief looks set to distort deals as much as taper relief ever did.

If the asset is securities in a trading company, then to get entrepreneurs' relief the taxpayer must have 5% of the ordinary shares and 5% of the votes and be an officer/employee of the company - and meet all of these requirements over the 12 months prior to the disposal.

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Pitfall no.1 - if the employee has share options - even EMI options - that are exercised just before an exit, the shares will not have been held for 12 months. 18%, ?not 10%.

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Pitfall no. 2 - if the employee quits or is terminated before selling shares - even selling his shares under good/bad leaver provisions relating to departing employees - the tests will not be met at the time of disposal; the tax just went up by 80%.

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Pitfall no. 3 - if the asset is loan notes received in return for shares on a paper for paper deal, the loan notes probably do not qualify for entrepreneurs' relief - the tax bill is deferred but it is at 18% unless appropriate elections are made, which accelerate the tax bill but can secure the 10% rate.

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In other words, rules that look simple have plenty of scope to go very wrong without a bit of planning. Until the rules are as well known as the old taper relief rules came to be, take nothing for granted and get advice in good time.

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