The Relief of an Entrepreneur

Can you imagine starting a company and then selling it a few years later to a big firm across the pond, trousering £millions in the process?

No, me neither. Fortunately though, some of the wonderful people we work with have done just that. It’s pretty amazing and a well-deserved outcome for years of hard work and dedication. ‘Inspired’ doesn’t even come close.

Anyhoo, I digress.

Should you find yourself in this remarkable position, you’ll have a lot to consider. I’ll cover the various eventualities of what to do (and, more importantly, not to do) in later blogs. However, today’s thoughts are around the tax implications of such a momentous event.

Entrepreneurs Relief (as you might guess) is a (tax) relief for Entrepreneurs who have sold part or all of their share in a business.

Basically, every UK resident gets the opportunity to sell their share in a business (or businesses) and apply for Entrepreneurs Relief, which is a tax of only 10% of the first £10million of any personal sale proceeds received.

For those bright sparks amongst us, you’ll note that 10% of £10M is £1M. Not exactly short change. “Is that even a good deal?” could be a fair question. Well, if you were to earn £10M a year in income (roughly what Eden Hazard’s base salary is at Chelsea FC), then you’d be paying a tidy £4.5M on that £10M mega package (the poor guy). This differs in Spain of course as it seems you pay no tax as a footballer, then get a hefty fine and a suspended prison sentence years later. I wouldn’t recommend that route, mind you.

Likewise, if Entrepreneurs Relief didn’t exist and it was just a ‘normal’ sale, then unlucky: you’d be paying £2M in tax. So, let’s have it right, 10% is the lowest tax rate you can find in general UK tax rules so you’ll be really laughing all the way to a big bank, or sharing it with someone else who has read about your good fortune in the news and sends a lovely Bentley to pick you up for a spot of lunch at the Ritz.

Here’s some other key considerations that may be less known in relation to Entrepreneurs Relief (based on tax rules as at the time of writing — cos, y’know, compliance):

Don’t let your equity holding go below 5% if you are a founder. Investors aren’t likely to point this out to you but don’t let your holding go below this figure when raising capital.

Always find someone to work with who has in-depth knowledge of Entrepreneurs Relief and other tax breaks that may apply for your newfound wealth.

If we were you, we’d probably take that trip in the Bentley and that free fancy lunch. Be mindful of course of the old saying “there’s no such thing as a free lunch”. Well, there is if you go along for it and never answer your phone to them again.

Alfie Mullan, August 2018

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