Entrepreneurs’ relief is a very valuable relief that can significantly reduce the capital gains tax payable when you dispose of all or part of your business. However, availability of the relief is contingent on certain conditions being met throughout a qualifying period, which is normally the 12 months prior to the disposal or date on which the business ceased. This means it is essential to plan ahead.
Entrepreneurs’ relief may be available in respect of the following:
- the disposal of all or part of a business, which you operated as a sole trader, or as a partnership in which you were a member;
- the disposal of assets following cessation of a business, which you operated as a sole trader, or as a partnership in which you were a member. In this instance the date the assets are disposed of must not be more than three years after the date on which the business ceased;
- a disposal of shares in your personal company – i.e. a company in which you have at least 5% of the shares and 5% of the voting rights; or
- an associated disposal, such as the disposal of assets owned by you personally, which you lent to the business.
For disposal after 3 December 2014 entrepreneurs’ relief is not available in respect of internally generated goodwill if you dispose of your business to a close company in which you or a near relative is a participator.
The precise conditions depend on the nature of the disposal and it is advisable to take professional advice in advance to ensure the conditions are met.
In respect of a disposal of all or part of your business, to qualify for entrepreneurs’ relief you must operate the business either as a sole trader or as a partnership in which you are a partner. In addition, you must have owned the business for at least 12 months prior to the date on which you sell it or close it down. Further, if you sell the business assets after cessation, the disposal of the business assets must take place within the three-year period following the date of cessation. If you are selling assets you lend to a business, the assets must have been used by the business for at least a year up to the date on which you sold the business or your shares in it.
Where the disposal is a disposal of shares in your personal company, the following conditions must be met for a year before the date on which the shares are sold:
- you must own at least 5% of the shares and 5% of the voting rights;
- you are an employee or director of the company (or of another company in the same group); and
- the company is a trading company.
Impact of the relief
Where the conditions are met, capital gains are taxed at a preferential rate of 10% (rather than 18% or 28%) on gains up to the lifetime limit, which has been set £10 million for disposal on or after 6 April 2011. Each spouse or civil partner has their own limit.
The relief must be claimed by the anniversary of the 31 January following the end of the tax year in which the disposal took place (so for disposals in 2015/16, the deadline is 31 January 2018). Claims can be made in the self-assessment tax return or on the dedicated claim form.
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