The Relief of an Entrepreneur

Can you imagine starting a company and then selling it a few years later to a big firm across the pond, trousering £millions in the process?

No, me neither. Fortunately though, some of the wonderful people we work with have done just that. It’s pretty amazing and a well-deserved outcome for years of hard work and dedication. ‘Inspired’ doesn’t even come close.

Anyhoo, I digress.

Should you find yourself in this remarkable position, you’ll have a lot to consider. I’ll cover the various eventualities of what to do (and, more importantly, not to do) in later blogs. However, today’s thoughts are around the tax implications of such a momentous event.

Entrepreneurs Relief (as you might guess) is a (tax) relief for Entrepreneurs who have sold part or all of their share in a business.

Basically, every UK resident gets the opportunity to sell their share in a business (or businesses) and apply for Entrepreneurs Relief, which is a tax of only 10% of the first £10million of any personal sale proceeds received.

For those bright sparks amongst us, you’ll note that 10% of £10M is £1M. Not exactly short change. “Is that even a good deal?” could be a fair question. Well, if you were to earn £10M a year in income (roughly what Eden Hazard’s base salary is at Chelsea FC), then you’d be paying a tidy £4.5M on that £10M mega package (the poor guy). This differs in Spain of course as it seems you pay no tax as a footballer, then get a hefty fine and a suspended prison sentence years later. I wouldn’t recommend that route, mind you.

Likewise, if Entrepreneurs Relief didn’t exist and it was just a ‘normal’ sale, then unlucky: you’d be paying £2M in tax. So, let’s have it right, 10% is the lowest tax rate you can find in general UK tax rules so you’ll be really laughing all the way to a big bank, or sharing it with someone else who has read about your good fortune in the news and sends a lovely Bentley to pick you up for a spot of lunch at the Ritz.

Here’s some other key considerations that may be less known in relation to Entrepreneurs Relief (based on tax rules as at the time of writing – cos, y’know, compliance):

  • Entrepreneurs Relief (ER) is applicable up to £10M of business assets sold or given away in one's lifetime.
  • ER is available to sole traders or partners selling or giving away part or all of their business.
  • ER is also available to company directors and employees having 5% or more shareholding (and who have held these for more than 12 months).
  • But, ER can apply to someone who has been issued share options through an Enterprise Management Incentive (“EMI”) option scheme. In these cases the rules are significantly relaxed with the employee not needing to hold 5% of the ordinary share capital or voting rights, with no minimum holding required (we will cover EMI in greater detail at a later date).
  • You can defer payment of the gain by reinvesting some of the money into another start up via an Enterprise Investment Scheme (EIS) – another subject we can cover in the future if anyone is still awake.
  • It was only a short time ago in March 2010 that the ER limit was only £2M!
  • ER must be claimed by the first anniversary of the 31st January following the tax year of the disposal (a sale this tax year would need to be claimed by 31st January 2020).

 

Suggestions

Don’t let your equity holding go below 5% if you are a founder. Investors aren’t likely to point this out to you but don’t let your holding go below this figure when raising capital.

Always find someone to work with who has in-depth knowledge of Entrepreneurs Relief and other tax breaks that may apply for your newfound wealth.

If we were you, we’d probably take that trip in the Bentley and that free fancy lunch. Be mindful of course of the old saying “there’s no such thing as a free lunch”. Well, there is if you go along for it and never answer your phone to them again.

We don’t own a Bentley and we won’t take you to the Ritz, but we do know about tax. We do know about Entrepreneurs and we do know about lifelong financial planning relationships. Oh, and we can source you a solid Shoreditch style banging flat white at our wonderful office cafe.

 

Alfie Mullan, August 2018