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Entrepreneurs’ Rate Relief – ERR

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Entrepreneurs’ Rate Relief – ERR

Reviewed: 25th August 2017

Entrepreneurs’ tax relief allows you to reduce the effective rate of Capital Gains Tax (CGT) to 10% on the sale or disposal of qualifying assets. This can represent a huge tax saving for company directors, sole traders, and business partners, and is available to spouses and civil partners if they also meet the qualifying conditions.

Gains are effectively treated as capital rather than income, and in order to benefit as a company director or employee, you must have a minimum shareholding of 5% when the sale or disposal is made. There is also a lifetime limit for those eligible of £10 million of capital gains.  

What exactly is Entrepreneurs Relief and how can you make a claim?

When you sell or dispose of a business, or part of a business, you may be eligible to claim entrepreneurs’ tax relief. By claiming ERR you reduce the liability for capital gains tax (CGT), but you must meet the qualifying conditions for one year prior to the disposal or sale.

Capital Gains Tax relief can be claimed via your self assessment tax return, by writing to HMRC, or on completion of Section A of the ‘Claim for Entrepreneurs’ Relief’ form which is available online.

The deadline for claiming is the 31st January of the year following the tax year in which the sale or disposal was made. So the deadline for disposals made in the current tax year (2017/18), is 31st January 2020.

What are the qualifying conditions for ERR?

Entrepreneurs’ relief is available to individuals rather than company entities. This can include directors and employees who hold a minimum 5% share and voting rights in the company, sole traders, and partners in business.

As we mentioned earlier, husbands, wives, and civil partners may also be eligible. So what are the eligibility requirements to gain relief on capital gains tax?

Selling or closing all or part of your business

This applies to sole traders and business partners. You must have owned the business for at least a year before it’s sold or closed. If you’re closing your business, there’s also a three-year timescale in which its assets must be sold if you’re to qualify for relief on capital gains.

ERR on the sale of company shares

You must have been an employee or office-holder for a minimum of one year to qualify for entrepreneurs’ relief on the sale of shares. The main reason for the company’s existence must also be to trade (see Close Investment Companies and ERR below).

Either of the following requirements must be met, and have applied for one year or more prior to the share sale date. The Enterprise Management Incentive scheme (EMI) provides the option for employees to buy shares in the company:

  • Non-EMI shares: you have a minimum 5% ordinary shareholding 
  • EMI shares: the option to buy your shares arose at least one year before their sale

Sale of personal assets used in the business

Personal assets lent to the company or business must have been used in the course of trade for a minimum of one year prior to their sale, or business closure. You must also be selling at least 5% of your shares or business partnership.

Close Investment Companies and ERR

Businesses deemed to be Close Investment Companies (CICs) by HMRC, i.e. those holding large cash deposits but that aren’t trading, may be rendered ineligible to claim entrepreneurs’ rate relief on the sale of their business assets, shares, or the company itself.

If you’re a contractor but are currently not working, for example, and have built up a significant amount of retained profits over the years, it’s likely that HMRC will view your business as a CHC:

  • If you also draw a salary
  • The cash/assets are not used for business purposes

If you’re experiencing problems in claiming ERR because HMRC have challenged your eligibility, we can provide professional advice on your situation. Potential issues with eligibility arise if you’re selling your business under an earn-out arrangement and leave before the money is paid, or you haven’t received a market salary during the arrangement.

Real Business Rescue has extensive experience of entrepreneurs’ rate relief, and can help you establish your eligibility. Our tax experts will advise on whether you qualify, and help you deal with challenges from HMRC. With 55 offices across the UK, you’re never far away from expert and confidential advice. – call one of the team for a free same-day appointment.

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