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More privately owned businesses are changing hands these days, thanks to confidence in the economy and a backlog caused by a reluctance to sell or buy in the recession.

However, despite more deal activity, capital gains tax (CGT) planning is often not being considered in enough detail or far enough ahead.

So says Jon Croxford, a partner and tax planning specialist at West Midlands-based private client law firm Meridian Private Client LLP.

Mr Croxford is mainly talking about ‘entrepreneurs’ relief’, which provides owner-managers of businesses with significant CGT benefits by allowing gains to be taxed at ten per cent when their businesses are sold rather than the normal CGT rate of 28 per cent for a higher rate taxpayer.

“An individual’s savings from this tax break can be as much as £1.8 million” said Mr Croxford, who adds that certain conditions have to be met for entrepreneurs’ relief to be available.

“The business must be a trade, not an investment and difficulties arise when a business combines both elements. This can even happen inadvertently” he said.

“For example, if a successful trading company generates cash which is surplus to trading requirements and which constitutes more than 20 per cent of the assets of the business, the relief may be lost”.

However, Mr Croxford points out that careful planning can help to secure the relief even in these circumstances.

He said: “Such surplus cash can be re-invested in trading activities. Alternatively, where there are separate trading and investment activities, it may be possible to split the existing company into separate trading and investment companies”.

He adds that the individual shareholder must, over at least a year prior to disposal, have met certain conditions for entrepreneurs’ relief to be available.

“If the business is held within a company, the individual must own at least five per cent of the ordinary shares and must also be an officer or employee, although not necessarily full-time” he said.

“As long as you plan ahead, you may be able to ensure that the business complies with the rules.

“It may be possible to go further by changing the shareholding structure to secure entrepreneurs’ relief for both husband and wife where they both have an appropriate role in the business. This could increase the tax break to £3.6 million.

“Professional advice should always be taken well in advance of the sale of a business.”

• Jon Croxford is partner and tax planning specialist at West Midlands-based private client law firm Meridian Private Client LLP.