Entrepreneurs Relief provides a reduced level of Capital Gains Tax to those who are eligible. The relief can be used when selling or disposing of all (or part) of your business. Qualifying assets will be taxed at 10% instead of the usual Capital Gains Tax rates of 18% or 28%.
Who Is Eligible?
Entrepreneurs Relief is available to individuals; typically those who run a business as either a sole trader, a member of a partnership or as a limited company.
You will qualify for the relief if you dispose of all or part of your business including the business’s assets after its closure. You’ll also be eligible for the relief if you dispose of shares in a company in which you hold a minimum of 5% shareholding; or if you dispose of assets that you have previously lent to your business.
Sale of a Business
If you’re selling all or part of your business and want to claim Entrepreneurs Relief, you must be either a sole trader or business partner and have owned the business for at least one year. You must also sell or dispose of the business’s assets within 3 years of selling the business in order to be eligible.
If you’re selling shares in your business, you must have at least a 5% shareholding as well as voting rights in the company. Furthermore, you must be either an employee or director of the company of which the main activities are in trading.
If you are selling assets that you lent to the business, you must have sold your part of the business and have owned the assets but let your business use them for at least one year in order to be eligible to claim Entrepreneurs Relief.
How Does Entrepreneurs Relief Work?
Individuals have a lifetime allowance of £10m. This means that up to £10m of Entrepreneurs Relief can be claimed during a person’s lifetime. This allowance was originally £1m but was increased in order to incentivise entrepreneurs. If you reach this threshold, subsequent gains are taxed at the standard Capital Gains Tax rate.
Disposals that qualify for Entrepreneurs Relief are taxed at a flat rate of 10%. In order to calculate your Entrepreneurs Relief, you need to subtract your Capital Gains Tax allowance (tax-free allowance) from the amount of your gain(s). Your tax liability is then 10% of this amount. If you have other gains that are not eligible for Entrepreneurs Relief, these will be taxed at the standard rates of 18% or 28% depending on your income.
Claiming Entrepreneurs Relief
Entrepreneurs Relief can be claimed through Self-Assessment or by completing the ‘Claim for Entrepreneurs Relief’ form. You can claim Entrepreneurs Relief as many times as you like, up to your lifetime allowance of £10m.
There are deadlines in place by which you must claim your tax relief. For tax year 2014/15, Entrepreneurs Relief must be claimed by 31st January 2017. For the current tax year, relief must be claimed by 31st January 2018.