09 Feb Entrepreneurs’ Relief: SMEs cashing in before tax relief ends
Rumours that Entrepreneurs’ Relief will be scrapped after the election have led to a marked increase in owner managed businesses seeking advice on trade sales and management buyouts.
The rumours follow the release of an National Audit Office paper in November which said the cost of the relief, in terms of lost tax revenues, has increased 500% in the past five years, with the 2013-14 cost of £2.9bn being three times HMRC’s prediction.
Entrepreneurs’ Relief was increased to £2 million in the March 2010 budget, and then again to £5 million 3 months later by the newly elected Conservative/Liberal coalition government. In the March 2011 budget it was raised to it’s current level of £10m, making it a very valuable relief to the entrepreneur, worth up to £1,800,000.
What is Entrepreneurs’ Relief and could it work for you?
Entrepreneurs’ Relief reduces the Capital Gains Tax (CGT) due on a disposal of qualifying business assets on or after 6 April 2008, as long as you have met the qualifying conditions throughout a one-year qualifying period either up to the date of disposal or the date the business ceased.
In short, entrepreneurs selling their business (or technically “qualifying assets”) can claim entrepreneurs’ relief. This is a lifetime allowance of £10,000,000 of gain that will be taxed at a reduced rate of 10%.
Entrepreneurs’ Relief is available to:
- Sole traders/partners selling or gifting either the whole or part of their business
- Company directors/employees holding at least 5% of ordinary shares and voting rights in a qualifying company who will share or gift all or part of their shareholding. To be eligible, a shareholder must have been involved for a year or more with a company as an employee or director.
Entrepreneurs’ Relief is only allowable in respect of relevant business assets, i.e. assets used for business purposes such as premises.
How can I claim Entrepreneurs’ Relief?
Entrepreneurs’ Relief must be claimed by the first anniversary of the 31 January following the tax year of the disposal. For example, if the disposal/sale of business occurs in the 2014/2015 tax year (ending 5 April 2015), Entrepreneurs Relief must be claimed by 31 January 2017.
Using Entrepreneurs’ Relief for succession planning
You could arrange for your company to buy your shares to help with succession planning. On retirement, you may want your colleagues to make you a cash offer for your shares, however they may not have sufficient cash resources to do so. One solution would be for the company itself to buy your shares, and then cancel them, leaving the remaining shareholders controlling the company. You end up with cash, and up to £10 million of the gain should be taxed at no more than 10% – assuming the disposal qualifies for entrepreneurs’ relief.
Entrepreneurs’ Relief: Sharing the benefit
If you own a trading company, you can reduce the CGT payable on a future sale by spreading the shares between yourself and your spouse/civil partner. If you both hold at least 5% of the ordinary shares, have done so for the 12 months before the sale and are either employed by the company, or are a director or company secretary, you should both qualify for entrepreneurs’ relief when the company is sold. This relief applies a reduced rate of CGT of 10% to the first £10 million of lifetime gains made per person.