Entrepreneurs’ Relief is a classic example of one of the ways that you can save money on your taxes that might have slipped under your radar. A large tax bill may be one of the reasons someone would not put their business up for sale but they might change their mind when they learn about Entrepreneurs’ Relief.

Although the name might make you believe that it only applies to serial entrepreneurs, any business owner who sells their company can benefit from this relief.

In this article, the Burton Beavan team will explain what entrepreneurs’ relief is and whether you can make use of it yourself when you sell up.

What is entrepreneurs’ relief?

Entrepreneurs’ relief was introduced in the 2008/9 tax year as a way of incentivising people to set up and grow businesses within the UK. The relief applies to capital gains tax on business disposals. This is the tax that is applied to all of the earnings that you make when you come to sell your business or its shares.

Entrepreneurs’ Relief is available to individuals and not to businesses. If a parent business sells off one of its child companies, corporation tax is payable if the parent company makes a profit that year. This means that, to benefit from Entrepreneurs’ Relief, you need to be either: a sole trader, a member of a business partnership, or a limited company shareholder.

How does the relief work?

The relief currently has a lifetime allowance of £10 million. This has been raised through the years, starting out as it started out at £1 million, rising to £2 million, and then £5 million.

“Qualifying disposals” (more on what those are later) are taxed at a flat rate of 10%. This is instead of the standard rates of 15% for a basic rate taxpayer, and 28% for a higher rate taxpayer. As you can see, for your first £10 million, this will represent a significant reduction in the amount that HMRC will take away from you.

To calculate the amount of Entrepreneurs’ Relief that you’ll have to pay, you need to remove your annual capital gains tax allowance from any gains that you make, and then take 10% away from that amount.

What are the qualifying costs?

The government has set out a list of qualifying conditions that you must meet if you are going to be able to benefit from Entrepreneurs’ Relief. You must meet all of these conditions within one year and these conditions are:

• When selling your shares in a company, the business must be within 3 years of ceasing to trade and you must hold more than a 5% share. Additionally, you must have either been an employee or a director of the company for over a year.
• Assets that are used in the business must be disposed of as a whole. This means that you can’t keep benefitting from the business once you have sold it.
• You must dispose of assets that were in use by the business within three years of you making a gain. This is the same as the previous point, but it is extended to things that your business owned previously.
• You must also dispose of assets owned by you personally, that were used in a business that you owned.

If these criteria sound a bit confusing, then contact us. We will be able to break this down for you further and help you to see if you qualify for the relief.

The targeted anti-avoidance rule

The targeted anti-avoidance rule (TAAR) was introduced in April 2016. This rule is specifically aimed towards shareholders in close companies (companies that have 5 or fewer shareholders or that have shareholders who are also directors). These shareholders had previously received a distribution from their company in the form of capital rather than income in order to gain a tax advantage.

HMRC has deemed this a form of tax avoidance and has since clamped down on the issue. Now, any capital that you gain from the disposal of a company will be treated as income for tax purposes.

Make the most from selling your business

If you are unsure about whether you qualify for Entrepreneurs’ Relief, then contact our team the Burton Beavan team today. Call us today on 01606 333900 or email hello@burtonbeavan.co.uk