Entrepreneurs' Relief can make a huge difference to entrepreneurs selling their business. Here's what you need to know
Entrepreneurs’ Relief allows entrepreneurs selling all or part of their business to pay Capital Gains Tax of 10%, rather than 18% (or 28% for payers of higher rate income tax), on a limit of £10m (as from April 2011) of profits over their lifetime.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief was created in 2008, after the announcement of the new flat 18% Capital Gains Tax (CGT) in that year’s Budget. The aim of it was to compensate entrepreneurs who would have paid a lower rate on selling a business under the abolished taper relief.
Initially, the lifetime limit was £1m. In 2010, then Chancellor Alistair Darling raised this to £2m. Three months later in June 2010, the new Coalition government announced a 28% rate of CGT for higher rate taxpayers, and increased Entrepreneurs’ Relief first to £5m, and then to £10m in the March 2011 Budget.
Previous to June 2010, the relief worked by reducing the amount of gains liable to CGT by four ninths. Today however, more simply, all gains up to the limit are taxable at 10%.
Entrepreneurs’ Relief conditions
In order to claim Entrepreneurs’ Relief, you must:
- own at least 5% of the company and 5% of the voting rights
- have owned at least 5% for a minimum of 12 months before you claim, or 12 months before the business stopped trading
- be an individual; companies cannot claim it
- work as an officer or employee of the company.
There is no limit to the number of times you can claim Entrepreneurs’ Relief, though over a lifetime you can only claim on a limit of £10m. If you have already claimed £6m on an earlier sale, you can only claim £4m on your next sale, even if it is of an entirely different business.
It’s also worth noting that if your spouse works in the business and also owns at least 5%, they will be able to claim Entrepreneurs’ Relief. This can be particularly important if you have already passed for lifetime limit. Transferring your shares to a spouse at least 12 months prior to sale might make financial sense.
The deadline for claiming Entrepreneurs’ Relief is a year from the 31st January following the tax year in which the business was sold.
Selling your business to utilise Entrepreneurs’ Relief
If you are contemplating a sale of your business in the next few years, make sure you get expert advice, for example from your accountant, to make sure your business is structured in such a way to make full use of Entrepreneurs’ Relief, and to ensure that scrutiny by HMRC won’t cause you any problems.