Entrepreneurs Relief helps people to reduce their tax liability when disposing of business assets. When conditions are met the relief enables individuals to pay a reduced rate of capital gains tax on gains on shares in all or part of their business.
Who can avail of entrepreneurs relief?
Individuals disposing of business assets who are looking to claim entrepreneurs relief need to meet the following criteria:
They must have held at least 5% of the companies ordinary share capital at least 5% of total the voting rights and also entitlement to 5% of the distributable reserves. This is defined as being a "personal company".
They must have been an employee or director of the company for over 12 months in the immediate period prior to the disposal.
The company must be a trading company or the holding company of a trading group. Generally this is taken to mean that 80% of the business must be engaged in trading activities, however, this 80% rule can be complicated.
If the above conditions are met, an individual should be able to avail of Entrepreneurs relief when they have a material disposal of business assets.
Entrepreneurs Relief and Members Voluntary Liquidation
Entrepreneurs Relief is usually applicable in the case of a members voluntary liquidation. In the case of an MVL, the distribution is deemed to be a capital distribution as opposed to dividends. This distribution will, therefore, be liable to Capital Gains Tax instead of Income Tax. If the conditions set out above are met Entrepreneurs Relief can be availed of.
There are anti-avoidance measures in place to stop business owners from using this means to withdraw cash from a business. An individual who avails of Entrepreneurs Relief is prohibited from setting up a similar company for the same trade within 18 months. If they do so original distribution on liquidation will be treated as dividends.
Limitations of Entrepreneurs Relief
There is no limit to the number of times you can claim Entrepreneurs Relief however the amount claimed is limited to £1m.
How to claim Entrepreneurs Relief
The relief must be claimed by the tax return deadline for the following year after the disposal of shares. In other words, this should give you 12 months from the end of the tax year in which the disposal occurred. However, it would make more sense for cash flow to do it earlier so as you can pay less CGT initially.
You will make the claim for ER on your self-assessment return in the Capital Gains Section.
Entrepreneurs Relief can be a massive tax saving for people however it is a complicated area and we would advise getting professional advice from an accountant to ensure it is treated correctly.