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Understanding Entrepreneurs' Relief

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Published: 8th April 2019

What is Entrepreneurs’ Relief and do I qualify?

Entrepreneurs’ Relief is a tax relief scheme which allows you to reduce the effective rate of Capital Gains Tax (CGT) from a top rate of 20% down 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.

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 no limit to the number of businesses you can sell throughout your career and still qualify for this scheme, instead Entrepreneurs’ Relief has a lifetime limit set at £10 million of capital gains; this means potential savings of up to £1 million per individual.   

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

When you dispose of a business, or part of a business, you may be eligible to claim Entrepreneurs’ Tax Relief. Disposal can be facilitated through a sale or gifting of the business, or closing down the company through a solvent liquidation procedure known as Members’ Voluntary Liquidation (MVL).

By claiming Entrepreneurs’ Relief you reduce the liability for CGT, but you must meet the qualifying conditions during the two years prior to the disposal or sale. Changes announced in the Autumn Budget 2018, increased this holding period from 12 months up to the current two years as of 6 April 2019.

Entrepreneurs’ Relief is most commonly claimed via your self-assessment tax return, however, if this is not possible you can also submit a claim by writing to HMRC, or by completing Section A of the ‘Claim for Entrepreneurs’ Relief’ HS275 form which is available online.

The deadline for claiming is the 31 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 (6 April 2018 – 5 April 2019) is 31 January 2021.

What are the qualifying conditions for Entrepreneurs’ Relief?

Entrepreneurs’ Relief is a scheme which 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 long as they meet the qualifying criteria. 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 company directors, sole traders and business partners. You must have owned the business for a minimum of two years before it’s sold or closed. If you’re closing your business, there’s also a three-year limit on the sale of its assets if you’re to qualify for relief on capital gains.

Entrepreneurs’ Relief on the sale of company shares

You must have been an employee or office-holder for a minimum of two years 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 Entrepreneurs’ Relief below).

Additional requirements are as follows:

  • Non-EMI shares: you have a minimum 5% of ordinary share capital and 5% of the voting rights. Your shares must also give you the right to 5% of distributable profits and a 5% interest in the assets of the company.
  • EMI shares: the option to buy your shares arose at least two years before their sale. The additional restrictions on non-EMI shares, discussed above, regarding share rights are not applicable.

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. This can be a complex area, particularly if the assets have been used for a mixture of both business and personal use. You are advised to speak to your accountant as the first port of call if you are intending to claim Entrepreneurs’ Relief on the sale of assets.

Close Investment Companies and Entrepreneurs’ Relief

Businesses deemed to be Close Investment Companies (CICs) or Close Investment Holding Companies (CIHCs) by HMRC, i.e. those holding large cash deposits but that aren’t trading, may be rendered ineligible to claim Entrepreneurs’ 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 CIC/CIHC if:

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

Potential issues with eligibility may also 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.

If you are considering an MVL for your company in order to take advantage of Entrepreneurs’ Relief, the experts at Real Business Rescue are perfectly placed to help. Our licensed insolvency practitioners can provide individual advice based on your current position and future ambitions and recommend whether an MVL is an appropriate course of action. With 78 offices across the country, you’re never far away from expert and confidential advice. – call one of the team for a free same-day appointment.