Entrepreneurs’ relief provides relief against capital gains tax on qualifying gains made by an individual on the disposal of all or part of the business, the assets in the business after it has stopped trading and shares in a personal trading company. HMRC Helpsheet 275 has more details on the relief.
Gains that qualify for entrepreneurs’ relief are taxed at 10% up to the maximum lifetime limit. This is £10 million from 6 April 2011. This is a very valuable relief and can save tax of up to £1.8 million.
However, its availability is contingent on certain conditions being met. The conditions must be met throughout the qualifying period. This is a period of one year ending on the date the asset was sold or business ceased, if earlier. Where shares are sold the qualifying period is the year ending on the date that the shares are sold.
The conditions depend on the type of disposal.
If you dispose of all or part of your business you must either own it directly or be a partner in the partnership that owns it.
If you dispose of assets following cessation, you must own the business directly or be a partner in the partnership that owns it. The assets must be disposed of within three years of the date on which the business ceases.
If the disposal is of shares or securities in your personal company, you must hold at least 5% of the ordinary share capital and that holding must give you 5% of voting rights in the company.
When planning an exit strategy action should be taken to ensure the qualifying conditions are met.
John has operated as a sole trader for many years and wishes to retire. The business ceases on 31 December 2011 and he disposes of assets used in the business on 28 August 2012, realising a gain of £60,000.
He has other gains in the year which utilise his annual exemption and is a higher rate taxpayer.
He meets the conditions for entrepreneurs’ relief. The gain is taxed at 10% generating a capital gains tax bill of £6,000. Had he not met the conditions for entrepreneurs’ relief, he would have had to pay capital gains tax of £16,800 on the gain (£60,000 @ 28%).
Claiming entrepreneurs’ relief saves tax of £10,800.