Solicitors and their business owner clients could be hit by the removal of a potentially valuable tax break in the 2014 Autumn Statement.
The Autumn Statement, delivered by Chancellor George Osborne on 3 December, contained a measure limiting the use of entrepreneurs’ relief, which reduces capital gains tax (CGT) to ten per cent – rather than the usual rates of18 per cent or 28 per cent – when all or part of qualifying business assets are sold.
With effect from 3 December, individuals or partnerships selling their business to a limited company to which they are a “related party” – e.g. they control or have a major interest in it – can no longer claim entrepreneurs’ relief on the sale of goodwill, i.e. the reputation and customer relationships associated with the business.
HM Revenue & Customs said: “The measure removes an unfair advantage available to proprietors of businesses who sell their business to a close company to which they are related in order to extract funds from the business at a special, low, rate of CGT.
“The direct impact will be on individuals when they incorporate their business on the specified terms, rather than on the businesses itself or on incorporations generally. Capital gains tax incorporation relief remains available, subject to the relevant conditions being met, and where it is due there will be no CGT charge on the incorporation of a business.”
The Autumn Statement also introduced a related measure restricting corporation tax relief where a company acquires internally generated goodwill from related parties on incorporation.
This measure will be included in the Finance Bill 2015 and, subject to Royal Assent, will apply to all transfers on or after 3 December 2014 unless certain conditions apply.
Moore Thompson can provide expert advice to maximise the tax efficiency of legal firms’ business structures, and those of their clients, and the value of business disposals. For more information, please contact us.