What is entrepreneurs’ relief?
A claim for entrepreneurs’ relief can mean the first £1 million of qualifying capital gains are charged at an effective CGT rate of just 10%. Because of this attractive tax rate, making sure your business is eligible for entrepreneurs' relief should be a key consideration when exiting your business.
What qualifies you for entrepreneurs’ relief?
There are several instances when an individual may be able to make a successful claim for entrepreneurs’ relief (Business Asset Disposal Relief) and we have listed the main situations where a claim can be made:
- Where you run your trading business as a sole trader or as a partner in a trading partnership, and you come to sell the whole or (in some cases) part of your businesses
- Where you are a company director or employee and you dispose of shares in your personal trading company
- Where you are a company director or employee, and you dispose of assets you own personally which are used in your personal trading company. For example, an individual who runs a trading business through a limited company and as part of their withdrawal from their business dispose of a shop used by the trading company. This special ‘associated disposal’ relief also includes the situation where a partner sells their interest in a partnership, and also sells an asset they own personally but which is used in the partnership’s trade.
- Where you are an employee or company director and dispose of qualifying shareholdings acquired under an enterprise management incentive (EMI) share option scheme
- Where you act as a trustee when you make a disposal of business assets, in certain specific circumstances
Detailed rules attach to claiming this relief and it is important to seek professional advice to ensure your circumstances will allow a successful claim for entrepreneurs' relief (Business Asset Disposal Relief) to be made.
Broadly, you can qualify for entrepreneurs’ relief (Business Asset Disposal Relief) if you are a sole trader, partner or own shares in a company, provided a business is carried on and certain other conditions are met.
What counts as a qualifying disposal?
We examine below the main qualifying conditions which apply to the main situations when entrepreneurs’ relief (Business Asset Disposal Relief) can be claimed:
Sole traders and partners
Entrepreneurs’ relief (Business Asset Disposal Relief) is available to a sole trader or partner where you make a disposal of business assets, and that disposal is a qualifying disposal. A qualifying disposal of business assets includes:
- A disposal of the whole or part of a business that you have owned for at least two years;
- This could include business premises and goodwill but not assets held for investment purposes;
- A disposal of assets that were in use for business purposes when the business ceased, providing that you owned the business for at least two years up to the date of cessation. The asset must be sold within three years of the cessation;
- Goodwill transferred to a limited company arising on an incorporation of a self-employment business will no longer qualify for relief and is an important exception to note. We can help explain the general tax consequences of incorporation and help ensure you claim all relevant business expenses.
A business will only count if it is a trade, profession or vocation conducted on a commercial basis with a view to making a profit. An investment business would not qualify. A disposal of furnished holiday lettings is potentially eligible for relief but a disposal of a ‘normal’ let property will not qualify.
Care needs to be taken when you are not making a full disposal of your business.
The rules are that a simple disposal of an asset without there being a change in the nature of the activities of an ongoing business, will not qualify for entrepreneurs’ relief (Business Asset Disposal Relief). For example, selling a shop from which the business is done will not qualify for entrepreneurs’ relief if the trading business continues.
Where only part of the business is sold, you need to check if this disposal is ‘part of the business’ or merely a disposal of some assets of the business.
You must be able to show that the part disposal causes there to be a significant change in the nature of the business before and after the sale. You should be able to say that before and after the sale, there are two different businesses.
Due to this, it is recommended specialist advice is taken to confirm a part disposal will qualify for relief.
How long do you need to hold shares for entrepreneurs’ relief?
For your shares to qualify for entrepreneurs' relief (Business Asset Disposal Relief), you must meet the following qualifying conditions for two years up to the date you dispose of your shares:
- You must be an employee or officer (e.g. director) of the company or, in relation to groups, of one or more companies which are members of the group
- The company must be a trading company, or it can be a holding company of a trading group
- The company in which the shares or securities are held must be your ‘personal company’
What is a trading company?
HM Revenue and Customs (HMRC) will generally consider a trading company to be a company which carries on trading activities and doesn’t carry on ‘substantial’ non trading activities.
The HMRC manuals identify several factors which should be considered in determining if the non-trading activities are ‘substantial’. For example, HMRC indicates not more than 20% of indicators such as turnover, balance sheet assets and staff resources should relate to non-trading activities.
You should weigh up the relevance of these factors as a whole and specialist advice is recommended where there is any doubt regards the business qualifying as a trading business. In many cases though, it should be obvious if non-trading activities are substantial and would prevent a successful claim.
What is a personal company?
A personal company is one where you own at least 5% of the ordinary share capital which gives you the ability to exercise at least 5% of the voting rights. In addition, you must either be entitled to at least 5% of the distributable profits and 5% of the assets available on a winding up, or be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.
Where your limited company uses assets which are personally owned by you, you should check to see if you can qualify for associated disposal relief. This form of relief only applies where you also dispose of shares of a company which qualify for entrepreneurs' relief (Business Asset Disposal Relief). The relief can be restricted on a just and reasonable basis where:
- the asset was used partly for non-business purposes, or
- the asset was not used in the business during the period of ownership, or
- the company reimbursed you for using the asset, for example, if the company pays you rent for using the asset
The associated disposal rules can also apply where a partner sells their interest in a partnership, and sells an asset they own personally but which is used in the partnership’s trade.
Care is needed when considering if you can claim for an associated disposal and generally, you must dispose of at least a 5% shareholding in a company or a 5% share in partnership assets. In some cases, the partnership interest deduction of 5% is relaxed and we’d recommend speaking with a professional to determine if you are able to meet the relevant criteria.
Assets disposed of after Cessation
As previously noted for a sole trader, entrepreneurs' relief (Business Asset Disposal Relief) may be available if you cease trading and within three years you dispose of an asset which was used in your business when you ceased.
It doesn’t matter what you do with the asset over the three years, for example, it could be a shop that you decide to rent out.
This is in contrast to how the ‘associated disposal’ rules work. HMRC will generally accept a claim for entrepreneurs' relief (Business Asset Disposal Relief) under the associated disposal provisions so long as the asset was used in the business in the period two years before cessation and the disposal takes place within one year of the business’s cessation. Alternatively, HMRC will accept a claim provided the disposal takes place within three years so long as the asset has not been leased or used for any other purpose in the meantime.
What is the entrepreneurs’ relief limit?
The lifetime limit has changed over time and currently, entrepreneurs' relief (Business Asset Disposal Relief) can be claimed on up to £1 million of capital gains in a lifetime. You can claim relief for gains on multiple occasions until the lifetime limit is reached. Gains which exceed the lifetime limit are taxed as normal capital gains.
For disposals prior to 11th March 2020, the lifetime limit was higher and previously stood at £10 million.
How and when to claim
Entrepreneurs' relief (Business Asset Disposal Relief) must be actively claimed and is not an automatic relief. Your claim must be made on or before the first anniversary of 31st January following the tax year in which the qualifying business disposal is made. For example, if the disposal were to occur in the current tax year (2022-23), the deadline for making a claim is 31st January 2024. You normally make the claim on your tax return, but you can potentially need to make a stand alone claim for relief.
How does CGT work without entrepreneurs' relief?
If you do not qualify for entrepreneurs' relief (Business Asset Disposal Relief), you pay CGT rates on any gains which exceed any available annual allowance you may have.
There are four rates of CGT which can potentially apply to a capital gain in excess of your annual exemption - 10%, 18%, 20% and 28%.
The rate which applies will depend on the type of asset that has been sold and the level of your taxable income.
The rate of tax on gains from residential property and carried interest is higher compared to other assets.
Where you’re a higher or additional rate taxpayer you’ll pay:
- 28% on your gains from residential property / carried interest
- 20% on your gains from other chargeable assets
For gains which fall within the basic rate band of tax, you’’ pay:
- 18% on your gains from residential property / carried interest
- 10% on your gains from other chargeable assets
TaxAssist Accountants can help you with your Capital Gains Tax
If you are considering selling a personal asset or all or part of your business, we can advise you of the tax planning opportunities available to you before you make your disposal, in order to mitigate or reduce potential tax liabilities. We have experts who can advise in all aspects of CGT and ensure you make all relevant claims.
It should be noted that the above information is intended to inform rather than advise and is based on legislation and practice at the time of publication. Taxpayers’ circumstances do vary, and individuals should consider taking professional advice to determine their eligibility for entrepreneurs' relief (Business Asset Disposal Relief).
Date published 20 May 2022 | Last updated 23 May 2022This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.