You can claim Entrepreneurs’ Relief (ER) when you dispose of a qualifying business asset through your self-assessment tax return or by completing Section A of the HS275 form from HMRC.
How to qualify for Entrepreneurs’ Relief
Before you make a claim, you need to ensure that you have met all the qualifying conditions. To be eligible to claim ER you will:
- Either be a sole trader, officer of the company, or an employee of the company
- Hold at least 5% of the share capital and at least 5% of the voting share capital of the company
- Not have exceeded your £1 million lifetime limit for claiming ER
In addition to fulfilling the three qualifying conditions above, you also need to satisfy the ‘qualifying period’ which is two years. This means that, as a minimum, you are able to show that you have met the qualifying conditions for two years, ending with the date that the business assets were disposed of.
It is important to be aware that there will be some differences on the rules which define eligibility depending on what type of business asset is being disposed of, or how the disposal comes about. We recommend that you refer to our in-depth article on Who can Claim Entrepreneurs’ Relief for detailed guidance on each of the possible instances and criteria.
How to calculate your tax for Entrepreneurs’ Relief
Remember, ER does not remove the requirement for you to pay tax, but simply allows you to reduce the rate of Capital Gains Tax (CGT) you need to pay on profits made through disposal of eligible business assets.
If your entire gain qualifies for Entrepreneurs’ Relief –
Where the only profits you make in a tax year all qualify for ER, you only have to apply one rate. Follow the steps below to calculate your CGT tax bill:
- Establish the overall profit made
- Deduct qualifying costs. These may include costs such as solicitor’s fees.
- Subtract your costs from your gain and then further reduce your tax bill by deducting your tax-free allowance. For the tax year 2019/20 the allowance is £12,000.
- Once you have taken away your annual allowance, you can calculate 10% from that final figure. The 10% amount of what needs to be paid for CGT.
If you have gains from multiple different assets –
If you also have additional gains from the sale or disposal of other types of assets that are not eligible for ER, then you will have to apply their usual CGT rates. To calculate how much CGT tax you will need to pay is dependent on what income tax band you are in. We have set out the different tax rate bands below to help you calculate your final CGT bill:
- For higher and additional rate taxpayers –
- Calculate 28% of the gain made on any residential property that you have sold (excluding your main house of residence if you have moved)
- Calculate 20% of the profit made through the disposal of any other type of chargeable asset
- Calculate 10% of the gain made on ER eligible assets
- The total of these figures will make up your CGT bill
- We would advise that you use your personal CGT allowance (currently £12,000 for the tax year 2020/21) against the gain that attracts the highest rate of tax applicable to you
- For basic rate taxpayers –
- Deduct your earnings from £50,000 as this is the maximum amount you can earn for the tax year 2020/21 to fall within the basic rate tax band.
- The amount left over is what you can apply the basic tax rates to. For example, if you earn £35,000 then any profits up to £15,000 will be taxed at basic rates.
- Calculate 18% of the profit made on any sale or disposal of residential property (excluding your main house of residence if you have moved)
- Calculate 10% on profit made through the disposal of any other type of chargeable asset
- Calculate 10% on gains made which are on ER eligible assets
- For amounts that exceed the £50,000 threshold, you will need to apply the higher and additional tax rates which are stated above
- Again, you should use your personal CGT allowance against the gain which attracts the highest rate of tax applicable to you
How to complete your personal tax return to claim Entrepreneurs’ Relief
There are two methods you can use to claim ER. The more common way is to report it on your self-assessment tax return. If you have already been submitting personal tax returns, then you will be familiar with the annual deadline of 31 January. If you need to file a personal tax return for the first time then you must register with HMRC beforehand in order to receive your Unique Taxpayer Reference number which will allow you to do so. For those who are completing their first self-assessment tax return for the purposes of claiming ER, you have a deadline of the first anniversary of 31 January following the end of the tax year in which you made the disposal. For example, if you sell your business at any time between 6 April 2019 and 5 April 2020 then you will need to claim this no later than 31 January 2022.
When filling out your personal tax return you will need to use the supplementary section titled ‘Capital Gains Summary’. It is also sometimes referred to as pages SA108. A PDF of the section can be found here. The form allows you to clearly report what you have made gains on, how many disposals you have made in a tax year, include allowable costs that can be deducted from your gains as well as include other information. It is important that you complete the section which states “If you are making any claim or election, put the relevant code in the box”. The code you need to enter for ER is ERL. Alongside the Capital Gains Summary section you need to provide a completed worksheet which shows your computations (calculations) of how you have come to enter all the figures onto your tax return. We strongly advise that you seek the help of a professional chartered accountant to provide you with accurate computations. These documents are then all submitted to HMRC as part of your self-assessment tax return and payment for tax owed needs also to be paid by 31 January.
The alternative way to claim for ER is by completing an HS275 form. This is only recommended for those who are unable to complete a personal tax return or for trustees who are claiming ER jointly with a qualifying beneficiary. More information for trustees and qualifying beneficiaries can be found in our article Who Can Claim Entrepreneurs’ Relief. A PDF of the HS275 form can be downloaded here. Again this form needs to be submitted to HMRC alongside a worksheet with computations detailing how much gain has been received and the amount of relief that is due to be claimed.
For any assistance required on claiming Entrepreneurs’ Relief, please do contact us to discuss our services.