ASK THE EXPERTS
Q. I wish to downsize my farm guest house business and workload. This would bring my turnover below the VAT threshold and I would like to deregister from VAT.
My accountant informs me that I would have to repay all VAT on property assets held, particularly on the two 4-bedroom houses built on the site eight years ago and let as holiday homes/guest house bedroom suites. Is this correct, as it greatly adds to the cost of my eventual retirement plans?
M. H., via website
A. Your accountant is correct. You need to account for VAT on the properties based on their current market value if you are now taking them out of the VAT system and have previously claimed VAT on them on the basis that they were being used for a VAT-registered business.
Q. Can you advise me on the following? In September last year, the electronics company which I founded in 2000 was finally sold. My original investment was approximately £300,000 and my share of the sale price was £1,080,000 giving a capital gain of £780,000 and, I have assumed, a CGT liability of approximately £140,000 by January 2011. Although I developed and managed the company until 2006, I decided to leave the running of the company to a management team, resigning from the Board in January 2007, forming a separate company to carry out design and development work. At this point and up until the sale last year, I retained approximately 35% of the shares.
My question is whether there are any ways to reduce my CGT liability? For example, am I eligible for entrepreneurs’ relief or, since I am using part of my funds to develop products within the new company, can this be used to reduce my liability? I would be grateful for any advice you can give.
J. L., via website
A. To qualify for entrepreneurs’ relief you need to have held at least 5% of the shares and been an officer/employee of the company throughout a one-year period during the three years prior to your sale of shares. You indicate that the shares were sold in September 2009 and therefore you would have to have fulfilled these conditions for a year during the period September 2006 to September 2009. You indicate that you may not have been an officer/employee since January 2007; therefore you probably don’t qualify for entrepreneurs’ relief.
If you use the money you have received to subscribe for new shares in your new company and your new company is a qualifying trading company, you will be able to claim EIS reinvestment relief. This allows you to defer paying CGT on that part of the gain that you have reinvested. The gain will not be taxed until you sell the shares in your new company. Tax is not avoided but it is delayed until you take your money out of a business altogether.
Whether or not it is a good thing to delay tax is questionable at the moment. If you pay the tax now the gain will be taxed at 18%. However, the forthcoming Budget indicates that CGT will be going up to at least 40%, so it may be advantageous in the long run to pay the 18% tax now and not seek to defer it as rates may be higher when you eventually come to pay the tax.