What is Entrepreneurs’ Relief?
Entrepreneur’s Relief is tax relief which reduces any capital gains tax incurred through disposing of qualifying business assets either by means of sale or gift. The qualifying business assets can be all or part of your business, assets that have been lent to the business and/or shares of a trading business. Entrepreneurs’ Relief is only available to individuals so you must be a sole trader, partner, company director, or employee who holds 5% or more of the shareholdings in the business.
How does Entrepreneur’s Relief work?
The lifetime allowance for Entrepreneur’s Relief has been increasing since it was first introduced in 2008 and currently stands at £10 million to date. This means you are able to continue using Entrepreneur’s Relief for multiple sales of businesses or business assets until you reach the £10 million threshold. Where the standard rate of capital gains tax is 10% for basic rate tax payers and 20% for higher rate tax payers, by applying Entrepreneur’s Relief this is reduced to a flat rate of 10%.
To calculate what tax will need to be paid after Entrepreneur’s Relief is applied you will first need to total your overall capital gains liability. You can then reduce this amount by your annual capital gains tax allowance. For the 2018/19 tax year this is £11,700 which will increase to £12,000 in the 2019/20 tax year. After deducting your allowance, 10% of the final figure will need to be paid as tax.
You must claim Entrepreneurs’ Relief by 31 January following the tax year of the disposal. So for example, if you sell shares in the 2018/19 tax year, you must claim the relief by 31 January 2020 and this can be done via your personal tax return.
How do you qualify for Entrepreneurs’ Relief?
As Entrepreneurs’ Relief offers a valuable tax break, there are certain conditions which must be met in order to qualify and to prevent people from taking advantage of the generous relief. All conditions must be met 12 months prior to the sale of the assets (although this is increasing to two years come April 2019).
- If you are selling all or part of your business as a sole trader or business partner then you must have owned the business for at least one year before the date you sell it.
- If you are selling shares of a business then you must be a company director or employee of the business for at least one year AND the company’s main activity must be trading (as opposed to non-trading activities such as investment).
- Where the company stops being a trading company, you may still qualify so long as you sell the shares within 3 years of the official end of trading date.
- For instances where you are selling assets that you lent to the business then you must have already sold at least 5% of your part in the business AND the company has been using your assets for at least one year by the date you sold your assets.
If you require any assistance with claiming Entrepreneurs’ Relief, or wish to discuss this any further, please get in touch today.