What Is Entrepreneurs’ Tax Relief?
Entrepreneur’s Relief reduces the amount of Capital Gains Tax paid on a disposal of qualifying business assets on or after 6th April 2008. Entrepreneurs’ Relief applies to individuals who are either a sole trader, member of a business partnership, or a limited company shareholder in a trading business. These individuals will qualify for Entrepreneurs’ Relief if they dispose of any of the following:
- Shares or securities in a company where they have at least 5% of shares and voting rights (known as a ‘personal company’).
- All or part of their business as a sole trader or business partner (including the business’ assets after it closed).
- Shares they got through an Enterprise Management Incentive (EMI) Share Scheme after 5th April 2013.
- Assets they lent to their business or personal company.
An individual may also qualify for Entrepreneurs’ relief if they are a trustee selling assets held in the trust.
If the individual qualifies for Entrepreneurs’ relief, they will pay Capital Gains Tax at the reduced level of 10% on all gains on qualifying assets.
If you’re selling all or part of your business, the following must apply:
- You’re a sole trader or business partner.
- You’ve owned the business for at least one year.
The above conditions also apply if you’re closing your business instead. You must also
If you’re selling shares or securities, the following must apply for at least 1 year before you sell your shares:
- You’re an employee or office holder of the company (or one in the same group).
- The company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.
If the company stops being a trading company, you can still qualify for Entrepreneur’s relief if you sell your shares within 3 years.
Either of the following must also apply for at least 1 year before you sell your shares:
- You have at least 5% of shares and voting rights in the company – if they’re not EMI shares.
- You were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.
If you’re selling assets you lent to the business, the following must apply:
- You’ve sold at least 5% of your part of a business partnership or your shares in a personal company.
- You owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date on which the business closed.
How To Calculate Your Capital Gains Tax:
If all your gains qualify for Entrepreneurs’ Relief, your Capital Gains Tax can be calculated as follows:
- Work out the gain for all qualifying assets.
- Add together the gains and deduct qualifying losses to calculate the total taxable gain that is eligible for Entrepreneurs’ Relief.
- Deduct your Capital Gains tax-free allowance.
- Your Capital Gains Tax is 10% of the value calculated.
If you have other gains that aren’t eligible for Entrepreneurs’ Relief, the Capital Gains Tax you pay on these depend on what Income Tax rate you pay as well as when you made the gains.
How To Claim Entrepreneurs’ Relief:
You can claim Entrepreneurs’ Relief either:
- Through your Self-Assessment Tax Return
- By filling in Section A of the Entrepreneurs’ Relief help sheet.
There is no limit to the number of times you can claim Entrepreneurs’ Relief. You can claim up to £10 million of relief during your lifetime.
The deadline for claiming Entrepreneurs’ Relief is 31st January in the year that is 2 years after the tax year in which you sold or closed your business. For example, if you made the gain in the tax year 2018 – 2019, the deadline to claim Entrepreneurs’ Relief is 31st January 2021.
For more information or advice on Entrepreneurs’ Relief, please do not hesitate to contact us.