Entrepreneur’s Relief can help business owners to cut the amount of Capital Gains Tax they need to pay when selling their business.
It was announced in the 2016 Budget that Entrepreneur’s Relief would be extended to external investors in ‘unlisted trading companies’ from April 2016.
Here’s a guide for business owners explaining what Entrepreneur’s Relief is, how you qualify for the relief and what you need to do to claim it.
NB. This guide is currently being updated to incorporate the announcements made in Budget 2016
Background to Entrepreneur’s Relief
Entrepreneur’s Relief was first introduced in 2008. The 2008 Budget abolished the taper relief rules on business disposals and brought in a new flat rate of Capital Gains Tax at 18%.
These measures meant that business owners who had built a business over many years, sometimes their lifetime, would have to pay a much higher rate of Capital Gains Tax when they came to sell their business.
As this could discourage entrepreneurs from building businesses, generating employment and creating wealth the government announced the introduction of Entrepreneurs’ Relief. This new relief was designed to compensate business owners who would have paid a lower rate of Capital Gains Tax (CGT) under the previous taper relief rules.
The relief allowed business owners to pay an effective 10% capital gains tax rate on business disposals up to a lifetime ‘allowance’ of £1m. In the first 2010 Budget, Alistair Darling raised the lifetime limit to £2m. This was further extended to £5m in the ‘Emergency Budget’ of 2010, effective from 23rd June 2010, and further increased to £10m in the Budget of 2011, effective from April 6, 2011.
Budget 2016 extends Entrepreneur’s Relief to investors
Prior to March 17, 2016 Entrepreneurs’ Relief (ER) was limited to business owners who were selling their business, or a part of it.
However, that was changed by Budget 2016, when George Osborne announced that Entrepreneurs’ Relief would be extended to include external investors in unlisted trading companies.
This new investors’ relief will apply a 10% rate of Capital Gains Tax (CGT) to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, subject to some qualifying criteria, which are detailed under Entrepreneurs’ Relief – Qualifying as an investor below.
Entrepreneur’s Relief – Qualifying as a business owner
In order to claim entrepreneurs’ relief, several conditions must be met:
1. The relief can only be claimed by individuals (sole traders, partnerships, of if you own shares in your limited company). Companies cannot claim relief.
2. You must have owned the business for 12 months before claiming the relief, or for 12 months before the date the business stopped trading.
3. You can claim relief on proceeds from a partial or full sale of a business, shares in a company, or on the value of any business assets remaining after the company has ceased trading.
4. You can claim as many times as you like, although entrepreneurs’ relief is subject to a lifetime allowance. From, April 6, 2011, the lifetime allowance for entrepreneurs relief is £10m. You will may the standard CGT rate on any proceeds beyond this limit.
5. Entrepreneurs’ relief reduces the gain liable to CGT by four-ninths, and then the standard rate of 18% (28% for higher rate taxpayers from 23/6/2010) is applied, giving an effective rate of 10% on any qualifying business sale proceeds.
Entrepreneur’s Relief – Qualifying as an investor
To qualify, an investor’s shares must have been newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for a period of at least three years starting from 6 April 2016.
A person’s qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million.
You can find out more about the conditions you need to meet in the HMRC helpsheet here (PDF document).
More on tax
For more help on tax matters, try these other ByteStart Guides;
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- 10 ways small business owners can pay less tax
- Corporation Tax – How to reduce your bill
- 10 common Self-Assessment Tax Return mistakes and how to avoid them
- Tax rates for small business owners – 2014/15
- Capital Allowances – A review of the various schemes available for businesses to cut their tax bill
- Using Research and Development tax relief to reduce your corporation tax bill
- How setting up a salary sacrifice scheme can reward staff and cut your tax bill