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Introduction to this document

Election for entrepreneurs’ relief to apply to QCBs

When you sell a business the purchasing company might offer to pay you with loan notes. This is a loan arrangement but in the form of a security, i.e. like shares. The loan notes pay interest usually at a fixed rate on a fixed amount of capital. They will usually have a redemption date on which the issuing company will repay the loan, although it may allow you to redeem some or all of them earlier.

When can you use the election?

Where loan notes meet certain conditions, essentially that they are issued in sterling and cannot be converted or exchanged into other securities such as shares, they count as qualifying corporate bonds (QCBs).

Where you receive loan notes which are QCBs as proceeds from selling your business, the capital gain is worked out as if the payment was in cash. However, taxation of the gain is deferred until the QCBs are sold, transferred or redeemed.

The drawback with QCBs is that unless all the conditions for entrepreneurs’ relief (ER) are met at the time of redemption etc. it will not be allowed against the resulting gain, even where it would have been had the gain not been deferred. In this situation an election can be made not to defer the taxation of the gain. While this accelerates the payment of tax, it can reduce the amount payable by allowing ER against it.

How to make the election

The election can be made in a letter or included in the additional information space of your self-assessment tax return. It must reach HMRC buy no later than 31 January following the tax year in which the gain arose. For example, if you sold your business in July 2016, i.e. in the 2016/17 tax year, the election must reach HMRC by 31 January 2018.