New businesses need to think about tax from the outset to avoid tax problems later. It is important to choose the right entity for your start-up whether it is sole proprietor, partnership, or some form of corporate body. We can advise on the advantages and disadvantages of each before making this choice and whether reliefs such as SEIS and EIS may be available.
It is important to incentivise and retain key employees and there are a number of tax efficient ways to achieve this. We can discuss with you the tax advantages of different share option schemes and which may be the most appropriate for your business.
Tax on profits:
Selling the business
When the business or assets used in it are sold, you are personally taxed on any gain under the Capital Gains Tax (CGT) rules.
Tax on profits:
You are taxed on:
Selling the business
When the business or the assets used in it are sold, there is a double tax charge on shareholders. The company pays corporation tax on any profit that it makes on disposal. The shareholders are taxed on the distribution of the proceeds.
Under the Seed Enterprise Investment Scheme (SEIS) new companies can raise seed capital: it provides 50% tax relief for investors investing in start-up companies, with also a generous Capital Gains break.
The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of tax reliefs to investors who invest in smaller, unquoted, trading companies.
Approved share optionscheme (usually an EMI scheme)
Employee Shareholder Status (or ESS) shares
HMRC approved scheme giving employees ability to get shares in a tax efficient manner.
A HMRC approved arrangement under which shares can be given to an employee if they surrender certain employment rights
No tax on granting the option.
No tax on exercising the option (as long as the employee pays an exercise price that represents the market value of the share at the time the option was originally granted).
CGT on sell the shares, hopefully at a reduced 10% rate
If value of shares issued is exactly £2k then no income tax charge for employee on issue of shares.
No CGT is payable by the employee when they sell the shares.
You can claim ER (which reduces the rate of capital gains tax you pay on the first £10 million of gains you make in your lifetime to 10%) for disposals of any of the following:
You can claim relief on proceeds from a partial or full sale of a business, shares in a company, or on the value of any business assets remaining after the company has ceased trading.
The relief is available for you as an individual if you:
In order to claim ER several conditions must be met:
1. You must have owned the business (or the shares) for 12 months before claiming the relief, or for 12 months before the date the business stopped trading.
2. It is essential that the business must be a trade and the activities must not include any non-trading activities that are substantial. The word “substantial” is not defined but HMRC accept that non-trading activities that make up no more than 20% of a business will not debar a claim for ER. When considering this test surplus cash can present problems. Cash that is not required as working capital or earmarked for capital expenditure or future business investment, may risk loss of ER as a substantial non-business asset. If you are building up cash reserves for a major purpose keep records of meetings and research done into possible acquisitions to prove that the money is retained for business purposes. This test must be passed throughout the 12 months before you want to claim ER.
3. If claiming ER on shares, a shareholder can qualify for ER as long as the company is their personal company. This means that for at least a year ending with the date of the disposal, the shareholder has been a director or employee, and has owned at least 5% of the ordinary share capital carrying at least 5% of the voting rights. Once the 5%test is passed other shares such as preference shares and certain types of loan note (non-qualifying corporate bonds) can also qualify for ER.
4. If claiming ER on shares it is important to remain an employee or an officer until the date the shares are sold. Therefore, if contemplating withdrawing from a business any resignation should not become effective before the contract for sale of the shares has become unconditional. Similarly, a non-employee shareholder (e.g. a spouse who owns shares but is not an employee) who meets the 5% test can qualify for ER by making them an employee or office holder (usually company secretary). There is no minimum working time condition, so long as the employment or office genuinely exists.