Entrepreneurs’ relief is a valuable relief from capital gains tax for individuals disposing of qualifying business assets.
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Entrepreneurs’ relief is an important consideration in deciding whether to sell shares in a company or the assets of a company. It only applies for disposals by individuals and certain trustees, companies are not eligible.
If you satisfy the legislative requirements for entrepreneurs’ relief, your effective rate of tax payable on the gain made following a sale of shares will be reduced to 10%.
Who qualifies for Entrepreneurs’ Relief?
You’ll qualify for entrepreneurs’ relief if you dispose of any of the following:
- all or part of your business as a sole trader or business partner – including the business assets after it closed
- shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)
- shares you gained through an Enterprise Management Incentive (EMI) scheme after 5 April 2013
- assets you lent to your business or personal company
- you may also qualify if you’re a trustee selling assets held in the trust
Selling all or part of your business
If you’re selling all or part of your business the following criteria must apply:
- you’re a sole trader or business partner
- you’ve owned the business for at least one year before the date you sell it
The same conditions apply if you’re closing your business except you must also dispose of your business assets within three years to qualify for relief.
Selling shares or securities
If you’re selling shares or securities the following criteria must apply for at least one year before you sell your shares:
- you’re an employee or office holder of the company (or one in the same group)
- the company’s main activities are in trading (rather than non-trading activities like investment) or it’s the holding company of a trading group
Either of the following must also apply for at least one year before you sell your shares:
- you have at least 5% of shares and voting rights in the company (if they are not EMI shares)
- you were given the option to buy them at least one year before you’re selling them (if they are EMI shares)
If the company stops being a trading company, you can still qualify for relief if you sell your shares within three years.
Selling assets you lent to the business
If you’re selling assets you lent to the business the following criteria must apply:
- you’ve sold at least 5% of your part of a business partnership or your shares in a personal company
- you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed
Time limit for claiming Entrepreneurs’ relief
Entrepreneurs’ relief must be claimed by the normal self assessment filing deadline, ie, by 31 January following the end of the tax year to which the claim relates.
Cobia Accounting are experts in the accounting and taxation of contractors, self-employed individuals and small businesses. If you would like assistance with your self assessment or any other accounting services, contact us today.