Changes to Entrepreneurs’ relief

What are the changes to Entrepreneurs’

When you sell an asset, the gain (if above the annual exemption of £11,100 – for 2015/16) the you pay tax on the gain. The rate of tax ranges from 18% to 28% for individuals. However, this rate can be reduced to 10% should you qualify for Entrepreneurs’ Relief.

What is Entrepreneurs’ relief?

Entrepreneurs’ Relief is a Capital Gains Tax (CGT) relief for business owners that reduces the amount of tax that you pay when you profitably sell a ‘qualifying asset’, such as share in your business.

Entrepreneurs’ Relief is important for all business owners because the CGT charge on qualifying assets is only 10%. However, with the rate of CGT on most assets (other than residential property and carried interest) now down to just 20% for higher and additional rate taxpayers, missing out on entrepreneurs’ relief has not been quite so serious since 6 April this year. But there is still 10% effective tax savings to be had, if you plan your disposals (and acquisitions correct).

There is an overall lifetime limit of £10 million on the amount of gains on which you can claim the relief and can claim the relief as often as you like up to this level.

Assets that qualify for Entrepreneurs’ Relief

There are several types of assets that can qualify for Entrepreneurs’ Relief, including but not limited to the disposal of:

  • All or part of a business owned by a sole trader or business partner, including the business’s assets after it closed.
  • Shares or securities in a company where the person making the disposal has at least 5% of the shares and voting rights.
  • Shares acquired through an Enterprise Management Incentive (EMI) scheme after 5 April 2013.
  • Assets the person making the disposal lent to their business or personal company for the trade.

A ‘Disposal’ for Entrepreneurs’ Relief in this context often means sale, but it could mean gift or even the liquidation of a personal company.

Entrepreneurs’ Relief for Directors of solvent companies

An important change made this April to Entrepreneurs’ relief hit directors who wind up a solvent company. They can no longer claim entrepreneurs’ relief if they continue to work in the same trade as the company in the following two years after the liquidation. As you may expect, a record number of solvent companies were wound up in March in anticipation of this change.

This new rule affected situations where a shareholding director sells the goodwill and other business assets out of their company and then puts the company into liquidation and takes the proceeds as a capital gain taxed at just 10%.

In such circumstances, the buyer of the underlying business might well expect the outgoing owner to continue working as a consultant for a changeover period. Such an arrangement could now present a problem and you should be aware of this possibility when negotiating a deal. Of course we can help with this and with anything tax related we believe it is essential to get advice on this matter.

The business or company being disposed of must be trading in order to qualify for the relief. So most forms of property letting are excluded from entrepreneurs’ relief. There can also be complications where a company owns a share in a joint venture with another company. Indeed, there are some changes to this situation in the Finance Bill.

Sole traders or business partners must have owned the business for at least one year before the date on which they sell it. And if an owner is closing their business rather than selling it, they must have also owned it for at least a year before the closure. The business assets must then be disposed of within three years to qualify for relief. For a sale of shares or securities, the seller must have been an employee, a director or some other office holder of the company being sold or one in the same group. Furthermore, for at least one year before the sale of the shares, the seller must have had at least 5% of shares and voting rights in the company, unless the shares were acquired through an EMI scheme. Assets such as property that a business owner has lent to their business may also qualify for entrepreneurs’ relief. They must have owned the assets but allowed the business partnership or personal company to use the assets for at least one year up to the date of the sale or the date the business closed.

This is a complex area, so do get in touch if you’re affected.