What is Entrepreneurs’ Relief?

Posted on Aug 19th, 2015 | Tax

Thinking about selling your limited business? Perhaps you’re retiring or going back into full time work?

If you want to sell all the stuff you’ve accumulated from a company which is no longer trading, you may have to pay Capital Gains Tax. This applies when you’ve made a profit on the original price of what you’re selling.

The regular rate of Capital Gains Tax is 18%, or 28% for people paying more than the basic rate of income tax, however applying for Entrepreneurs’ Relief allows sellers to only pay a reduced rate of 10% on the sale. This incentive was introduced in 2008 to encourage people to set up and grow businesses, creating jobs and economic growth.

In our example, these two people are closing their business due to retirement. They would have to go through a Members Voluntary Liquidation in order to claim Entrepreneurs Relief.

Sarah

 

generic_woman (1)

Jimmy

 

generic_man (1)

Has full time job (is a higher rate tax payer)

Has full time job (is a higher rate tax payer)

WITHOUT Entrepreneurs Relief

WITH Entrepreneurs Relief

Creates a limited company

Creates a limited company

Closes business with £100,000 profits

Closes business with £100,000 profits

Annual exemption (2015-16 rates): £11,100

Annual exemption (2015-16 rates): £11,100

Taxable Capital Gains: £88,900

Taxable Capital Gains: £88,900

Pays Capital Gains Tax of £24,892 (28%)

Pays Capital Gains Tax of £8,900 (10%)

Who can claim Entrepreneurs’ Relief?

      • A claimant must be an individual, not a company.
      • They must have been serving as a partner, company director, or have been an employee, and held at least 5% of the shares in the year before the sale.
      • They must be a trading company, not an investment company for the last 12 months of trading.
      • In the unfortunate circumstance that the business has closed but not been sold, the relief can be claimed against Capital Gains Tax on ‘assets’ used in the business, as long as they’re sold within three years of the closure.
      • As per our example, these ‘assets’ are the shares they are disposing of.
      • There are no limits to how many times a person can claim, although Entrepreneurs’ Relief is subject to a lifetime allowance of £10 million for disposals on or after 6th April 2011.

How and when should I register for Entrepreneurs’ Relief?

To avoid missing the boat, you need to claim Entrepreneurs Relief by the first anniversary of the 31 January following the tax year of the transaction. So:

Tax year (6th April to 5th April) when you sold or closed your business Deadline to claim Entrepreneurs’ Relief
2015 to 2016 31 January 2018
2014 to 2015 31 January 2017
2013 to 2014 31 January 2016

You can make a claim on your annual Self Assessment return in the supplementary ‘Capital Gains Summary’ section. However, seeking advice beforehand from an accountant is highly recommended.

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Written by Tom West

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