If you wish to sell up or wind up your business, you’ll likely have to pay capital gains tax on any profit you make from selling your business assets. However, the Entrepreneurs’ Relief scheme can help you save a fortune in tax by allowing you to pay less capital gains tax.
If you are new to Entrepreneurs’ Relief, here’s everything you need to know:
- What is entrepreneurs’ relief?
- Entrepreneurs’ relief qualifying conditions
- How to claim Entrepreneurs’ Relief
- Deadline of claiming Entrepreneurs’ Relief
What is entrepreneurs’ relief?
Entrepreneurs’ Relief means you will pay tax at 10% on all gains on qualifying assets. It is available for up to £10,000,000 lifetime gains. The 10% capital gain tax rate is helpful for business owners as it’s considerably less than the usual charge for basic rate income taxpayers of 18% and 28% for higher rate payers.
Entrepreneurs relief qualifying conditions
To qualify for relief you must meet certain criteria:
If you are selling all or part of your business
If you are selling all or part of your business you must be a sole trader or business partner to qualify for the relief. You should also have owned the business for at least 2 years before the date you sell it. Both of these two criteria must apply to you to qualify for the relief.
If you are closing your business
The same conditions as selling your business apply for closing your business. You must be a sole trader or business partner and have owned the business for at least 2 years before the date you sell it. However, you have to take note that you must dispose of your business assets within 3 years to qualify for the relief.
If you are selling shares or securities
For you to qualify for entrepreneur’s relief, before selling your shares or securities, the following requirements must apply for at least 2 years before you sell your shares:
- You are an employee or officeholder 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 is the holding company of a trading group
Rules regarding entrepreneur’s relief, if you are going to sell shares and securities, will also depend on whether or not the shares are from an Enterprise Management Incentive (EMI) – a tax-advantage that may be available If you work for a company with assets of £30 million or less.
Shares from an EMI
If your shares are from an EMI, you must have both of the following requirements:
(1) You bought the shares after 5 April 2013
(2) You were given the option to buy them at least 2 years before selling them
Shares not from an EMI
Meanwhile, if your shares are not from an Enterprise Management Incentive, the condition for enterprise relief is that for at least 2 years before you sell your shares, the business must be a ‘personal company’. This means that you have at least 5% of both the shares and voting rights.
You must also be entitled to at least 5% of either of the following conditions:
(1) Profits that are available for distribution and assets on winding up the company
(2) Disposal proceeds if the company is sold
You may still be able to claim entrepreneurs’ relief even if the number of shares you hold falls below 5% because the company has issued more shares. All you need to do is to choose or ‘elect’ to be treated as if you had sold and re-bought your shares immediately before the new shares were issued. This way you will create a gain in which you can claim for the relief.
You can also choose or ‘elect’ to postpone paying tax on that gain until you come to sell your shares. You can do this by doing the following actions:
(1) Complete the additional information section of the capital gains summary form on your tax return
(2) Write to HMRC if you do not have to complete a tax return for the year
If the company stops being a trading company
If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.
If you are selling assets you lent to the business
To qualify for the relief from selling your asset you lend to the business, both of the following conditions must apply:
- You have 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 the business closed
If you are a trustee
You may also qualify for entrepreneurs’ relief if you are a trustee selling your assets held in the trust.
How to claim Entrepreneurs’ Relief?
There is no limit to how many times you can claim for the relief. You can claim up to £10 million of entrepreneurs’ relief during your lifetime. You can claim this relief either through your self assessment tax return or by filling in Section A of the Entrepreneurs’ Relief helpsheet. You can also contact our tax experts at GrowFactor to get help with your claim.
Deadline of Claiming Entrepreneurs’ Relief
Tax year when you sold or closed your business
Deadline to claim Entrepreneurs’ Relief
2018 to 2019
31 January 2021
2017 to 2018
31 January 2020
2016 to 2017
31 January 2019
If you are a business owner, entrepreneurs’ relief can benefit you by saving you a small fortune on your tax bill. It is important to understand which gains are eligible for relief when working out your tax bill. A tax accounting expert can give you the clarity you need regarding this relief. At GrowFactor, we save our clients between 5,000 and £50,000 in tax on average. Want a free tax review? Book today to find out how much you could be saving and make a claim.