Reply to: Entrepreneur's relief and dividends

[Alfie]

Thanks Moscow Mule.

I did go through this HMRC link:
http://www.hmrc.gov.uk/cgt/disposal.htm

And based on the above, I felt that I would be eligible for this relief when I close down my limited company anytime after 2 years (even if I actively work here only for lets say 6 months or one year).

But when I talked to my accountant, he says I wont be elgible, because:
1) I need to "actively trade" through that limited company for at least 2 years to be eligible, and
2) If I have been drawing out dividends from the company, then I would not be eligible for entrepreneurs' relief!

When I asked him for any links/documents to substantiate the above two points, he says that it is a new ruling, so proper documentation is not available yet.

Thats why posted this question on the board. Do you think the accountant is correct or is mis-informed?

Any further help/pointers will be much appreciated.

Thanks.

I've not heard anything to substantiate the dividend part, and my last update course on the subject was last week. So unless they have quietly changed the law in the last week, it's wrong.

Is is possible you misunderstood, or he explained it badly? As in - you can't have a capital dsitribution because you've already drained the company dry by taking the whole retained profit as dividends and there's nothing left to declare as a CD?

ER is really quite simple as far as disposing of a whole Ltd Co is concerned, where it gets far too complicated is when making a material or associated disposal. Simplifying the tax system my

[Gonzo]

When I asked him for any links/documents to substantiate the above two points, he says that it is a new ruling, so proper documentation is not available yet.

Thats why posted this question on the board. Do you think the accountant is correct or is mis-informed?

This is probably not the answer that you want to hear but my accountant when I asked said we would need to wait to see the rules, but his tone was not hopeful for people like us.

[Crossroads]

Any information (or useful links) from which we can find out what are the eligibility criteria for qualifying for Entrepreneurs' Relief?

Suppose I am doing IT contracting outside IR35, for a year (annual revenue of 120K, taking annual salary as 15K, taking dividends upto 40K, and leaving the rest in company account). If I get the company closed after 2 years, will I be eligible for this relief on closing?

Thanks.

The important bit is whether or not your are granted ESC C16. This will establish whether or not you can take the undistributed profits as capital rather than income.

If ESC C16 is granted then you and apply ER as long as the basic qualification terms are met - the main one being the lifetime limit - and if you have reached the limit you probably don't need to worry about the 8%

[Pegasus]

Thanks Moscow Mule.

I did go through this HMRC link:
http://www.hmrc.gov.uk/cgt/disposal.htm

And based on the above, I felt that I would be eligible for this relief when I close down my limited company anytime after 2 years (even if I actively work here only for lets say 6 months or one year).

But when I talked to my accountant, he says I wont be elgible, because:
1) I need to "actively trade" through that limited company for at least 2 years to be eligible, and
2) If I have been drawing out dividends from the company, then I would not be eligible for entrepreneurs' relief!

When I asked him for any links/documents to substantiate the above two points, he says that it is a new ruling, so proper documentation is not available yet.

Thats why posted this question on the board. Do you think the accountant is correct or is mis-informed?

Any further help/pointers will be much appreciated.

Thanks.

[Moscow Mule]

Look on HMRC for eligibility. From what you (briefly) say I can't see any reason why not, but IANAA.

[Pegasus]

Any guidance from the learned members, regarding the eligibility for the Entrepreneurs' Relief?

I am sorry if it has already been discussed before. I have joined the forum very recently, and a quick search of the threads also did not yield anything significant!

Thanks.

[Pegasus]

Hi

If it is capital then you (personally) can apply the Entrepreneur's relief (providing you qualify) and then you only have to pay 10% tax

Any information (or useful links) from which we can find out what are the eligibility criteria for qualifying for Entrepreneurs' Relief?

Suppose I am doing IT contracting outside IR35, for a year (annual revenue of 120K, taking annual salary as 15K, taking dividends upto 40K, and leaving the rest in company account). If I get the company closed after 2 years, will I be eligible for this relief on closing?

Thanks.

[Bumfluff]

Oh well, thanks Malvolio and Ruprect for clarifying this for me.

[malvolio]

Why would you pay yourself such a high salary?

He's assuming IR35 caught, so doesn't have a choice.

And as for the bonus payment idea, that doesn't work either, since you have to take 95% of gross contract income as salary: doesn't matter when you take it , but it is salary and not gross profit.

[vhadiant]

What about then if you have a turnover of £150k, you pay yourself £65k a year which is permy market rate and intend to take the rest as a bonus at year end, but then you decide to close the company, would I be forced to take the bonus money out as salary or could I apply the Entrepreneur relief on this and take it out that way ?

Why would you pay yourself such a high salary?

[Bumfluff]

Yes - that's the whole point of it isn't it?

What about then if you have a turnover of £150k, you pay yourself £65k a year which is permy market rate and intend to take the rest as a bonus at year end, but then you decide to close the company, would I be forced to take the bonus money out as salary or could I apply the Entrepreneur relief on this and take it out that way ?

[Ruprect]

Can you use the Entrepreneurs reflief even if you ran a ltd but your contracts failed IR35 ?

What I'm getting at is if you fail IR35 does the HMRC expect you take all money out as a salary or can you leave some in and then make use of the Entreprenuers relief on that ?

Cheers

Yes - that's the whole point of it isn't it?

[Bumfluff]

Can you use the Entrepreneurs reflief even if you ran a ltd but your contracts failed IR35 ?

What I'm getting at is if you fail IR35 does the HMRC expect you take all money out as a salary or can you leave some in and then make use of the Entreprenuers relief on that ?

Cheers

[Hex]

Not quite. The correct calculation is as follows:-

Capital gain = £100,000
Entrepreneurs' relief reduction (4/9) - £(44,444)
Net Chargeable gain - £55,556
Annual exemption - £(9,600)
Taxable gain - £45,956
Tax @ 18% = £8,272

I stand corrected. So it's not just a flat 10% then, it's a 4/9ths taper relief.

[THEPUMA]

So, simplistic calculation presuming 1 100% shareholder, 100K in the company bank account (AFTER CT has been paid) would be as follows:

Capital Gain = 100,000
Personal Capital Gains Allowance = 9,200
Capital gain subject to tax = 100,000 - 9,200 = 90,800
Tax payable = 10% * 90,800 = 9,080
Net Gain = 100,000 - 9,080 = 90,920

Not quite. The correct calculation is as follows:-

Capital gain = £100,000
Entrepreneurs' relief reduction (4/9) - £(44,444)
Net Chargeable gain - £55,556
Annual exemption - £(9,600)
Taxable gain - £45,956
Tax @ 18% = £8,272