Entrepreneurs’ Relief Increase
In the 2011 Budget, George Osborne announced that the lifetime limit of qualifying capital gains for Entrepreneurs’ Relief would be rising to £10m from 6 April 2011. But what is this Relief and will it ever come in handy?
Entrepreneurs’ Relief reduces the amount of tax to pay when selling your small business or your share of it. Such a sale is likely to be one of the most important business decisions you will ever make and optimising your tax position will lead to a better deal.
Entrepreneurs' Relief reduces Capital Gains Tax (CGT) on the disposal of ‘qualifying’ business assets sold on or after 6 April 2008 and is available to individuals and some trustees, but not to companies or personal representatives of deceased persons.
Relief may be claimed upon the disposal of the following assets (provided you have met the qualifying conditions for at least the year immediately prior to cessation):
- If you are a sole trader or partnership and currently trading…
Assets used in the business comprised in the sale of the whole or part of your business whether you carried on the business on your own or in partnership. Note that the Relief is not generally available on part-sale of a continuing business, unless they represent a distinct part of the business
- If you have ceased trading…
Assets that were in use for your business or a partnership of which you were a member, and were sold within three years of it ceasing to trade
- If you personally own the assets…
Assets owned by you personally but used in a business carried on by either a partnership of which you were a member, or by your personal trading company, as long as the sale is associated with a sale of your interest in the partnership or shares/ security in the company.
- If you own shares…
Assets (consisting of shares or securities) of your ‘personal company’, which must be sold while the company is a trading company or within three years from the date it ceased trading
In order to satisfy the fourth scenario, the company must be:
- A trading company;
- Of which you are an officer holder (e.g. director) or employee; and
- Your ‘personal company’, i.e. a company in which you hold at least 5% of the voting shares. Please note, shareholdings of husbands and wives are treated individually- not amalgamated- and for Entrepreneurs’ Relief purposes, they do not ‘inherit’ one another’s duration of ownership if they are transferred between one another. Also check that there are no share schemes or warrants in place, as these will ‘dilute’ your shareholding
Again, these criteria must be maintained for at least one year immediately prior to the disposal, in order to qualify for the Relief.
Entrepreneurs’ Relief is even available on furnished holiday lets (FHLs) in the UK or European Economic Area- provided that they meet the proper definition. Whilst there have been withdrawals of favourable tax treatments of FHLs and it is more difficult to meet the definition now, the CGT position was left alone, and therefore, FHLs can still qualify for Entrepreneurs’ Relief.
As there are minimum durations of ownership and time restrictions regarding when the sale is made etc, it is imperative that you seek professional advice and start your preparations early. This will then avoid the need for any last-minute attempts to undertake high-risk and dubious tax strategies.
The £10m limit is over your lifetime; not an annual amount. Therefore, it is also recommended that you keep a record of the gains against which you make a claim for Entrepreneurs’ Relief.
It is an incredibly generous relief and the conditions in order to qualify are also fairly painless and straightforward. Claims must be made by 31 January following the end of the tax year in which the qualifying sale takes place. Claims can be made directly on the tax return, or may also be done in writing or using a form.
Posted by Emma Clarke
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