Overview of Entrepreneurs Relief:
Entrepreneurs Relief is a capital gains tax benefit available to business owners, partners, and some shareholders. In most circumstances, company owners who sell residential property have to pay a 28% tax on the gains made in that sale. Other assets that are sold will have a capital gains tax of 20%.
- Those eligible for Entrepreneurs Relief are instead taxed only 10% on similar gains. There is no limit for the amount of times an individual can apply for relief. They can qualify for up to £10 million in gains in their lifetime, recently increased from £5 million.
- The thinking behind this policy is that it helps to incentivize entrepreneurs to reinvest and build their business or invest in new ones.
Who Does it Affect?
- Entrepreneurs Relief is available to sole traders or partners selling or giving away all or a certain part of their business. One must be an owner for at least a year before they sell however much of the company. It is also available to directors and employees having 5% or more shareholding in the company.
- For people looking for this tax benefit from selling shares of a company, they must be an employee of that company. The HMRC states that the business can’t include to a substantial extent activities other than trading. The phrase, ‘substantial extent’ is somewhat ambiguous, but means that the company can’t have more than 20% of its business involve non-trading activity. This includes value of non-trading assets as well as the turnover and expenditure on non-trading activity.
Conditions for Claiming Entrepreneurs Relief
- If you are looking to apply for Entrepreneur’ Relief, you have until a year after the 31st of January that follows the tax year in which you sold your qualifying assets. So if you sold your business in the 2017-2018 tax year, you would have until 31st of January 2020 to claim Entrepreneurs’ Relief.
- Assets that are necessary for the operations of a business will qualify for relief. This asset also needs to have been owned for at least a year before its sale. There are some exceptions to this condition where non-essential assets can qualify for relief if they are sold after an essential asset is sold. This is called an associated disposal.
- Non-essential assets can be considered associated if the individual who’s selling them also disposes of all or part of their interest in the company. It also would be associated if the asset was used after the essential asset was sold but also within a year of the company or partnership ending.
You can go about claiming Entrepreneurs’ relief through a self-assessment tax return or by filling in Section A of the Entrepreneurs’ Relief help sheet, both of which can be found on https://www.gov.uk/entrepreneurs-relief/how-to-claim.