What is entrepreneurs’ relief and how do I claim it?
First published 25 November 2019 • Updated 06 January 2020
What is entrepreneurs’ relief?
Entrepreneurs’ relief is a tax relief that lets you sell all or part of your business (or its assets) and pay only 10 per cent capitals gains tax (CGT) on the profits you’ve made, up to £10m in total. If you would otherwise pay higher rate CGT (20 per cent), this means you can save up to £1m in your lifetime through entrepreneurs’ relief.
- What assets qualify for entrepreneurs’ relief?
- Can I claim entrepreneurs’ relief?
- How much is entrepreneurs’ relief worth?
- Can couples claim entrepreneurs’ relief?
- What are the risks when claiming entrepreneurs’ relief?
- What is investors’ relief?
- How can my accountant help?
What assets qualify for entrepreneurs’ relief?
Entrepreneurs’ relief covers both shares and business assets. This means that sole traders and partnerships can claim it when selling assets used in the business, just as company directors and other shareholders can claim it when selling shares (and/or assets used in the business).
Can I claim entrepreneurs’ relief?
To claim entrepreneurs’ relief you have to fulfil certain conditions, as follows.
The 2 year qualifying period
There are two conditions in particular that you must fulfil for a minimum of 24 months, if your sale of assets is to qualify for entrepreneurs’ relief:
1. Are you an employee or sole trader?
You must be either an employee of the company (this includes being a company director) or else a sole trader.
2. Do you own at least 5 per cent?
If you’re selling company shares, you must own at least 5 per cent of the company’s share capital to qualify for entrepreneurs’ relief. This must be at least 5 per cent by value (not just number of shares) and you must also be entitled to at least 5 per cent of voting rights.
Other rules of entrepreneurs’ relief
Your sale of shares or other business assets must also meet a few other conditions.
3. Did the business close less than 3 years ago (or is it still operating)?
If the business has ceased trading, then this must be within three years prior to the sale. You can’t claim on assets of businesses that folded more than three years ago.
4. Are you selling a ‘going concern’?
If you’re selling only part of a business, then it must be commercially viable and able to continue (known as a ‘going concern’ in accounting-speak). This means you can’t just sell off loss-making parts of a business and claim entrepreneurs’ relief.
5. If the assets include property, does the business use it rent-free?
Property sales can only qualify for entrepreneurs’ relief if the property is exclusively a business asset (e.g. a shop or warehouse) owned by the business and used rent-free. If your company pays rent on the property, or if you are property landlord holding your portfolio in a company structure, then the property is classed as an investment rather than an asset, so does not qualify for enterpreneurs’ relief.
How much is entrepreneurs’ relief worth?
Using entrepreneurs’ relief often means paying half as much CGT as you otherwise would when selling shares or business assets. If your year’s total income (that is, your regular income plus any taxable gains, minus your personal allowance and your CGT allowance) takes you into the higher-rate tax band, then you would normally have to pay higher-rate CGT at 20 per cent. But sales of assets that qualify for entrepreneurs’ relief attract only basic-rate CGT, so you would pay just 10 per cent.
Entrepreneurs’ relief can be claimed on up to £10m of assets, with everything above this limit taxed at 20 per cent. This means that the relief can save you up to £1m. Note that this is a personal, lifetime limit, so you can never claim more than this.
Can couples claim entrepreneurs’ relief?
If you own a business with your spouse or civil partner, you can of course both claim entrepreneurs’ relief, and each of you can claim on up to £10m of assets (potentially saving you £2m in total). What you need to remember is that both of you must fulfil all the qualifying criteria. That is, you must both be employed in the business and each own at least 5 per cent of it, and this must be the case for at least two years. A spouse can’t use their spouse’s allowance just because they are married – both people must qualify.
What are the risks when claiming entrepreneurs’ relief?
There are a few pitfalls to watch out for when selling business assets, to ensure you don’t accidently lose out on entrepreneurs’ relief.
Selling to a larger company
If you’re selling your business (or part of it) to a larger company, beware if they offer to buy it with shares in that company, instead of cash. If the company is much larger, your shares may comprise under 5 per cent of the total capital and voting rights. This would mean that you no longer meet the qualifying criteria for entrepreneurs’ relief when you come to cash in the shares.
Holding a small share in the company
If your share in your company is very close to the 5 per cent lower limit, you will want to ensure it does not fall before this threshold at a time when you want to sell up. Other share allocations may dilute your holding, so monitor your situation carefully and regularly.
Other employees activating share options
Again, if your share is near the 5 per cent threshold, it may be tipped below 5 per cent if other employees activate share options. Companies can protect against this predicament by insisting that options are only activated on the day of sale, immediately before the sale goes through.
What is investors’ relief?
Investors’ relief is an extension to entrepreneurs’ relief that offers similar tax benefits, but for people who are not employees or directors of the company issuing the shares. You can only qualify for this relief if you have no connection with the company.
There is no minimum shareholding, so you can also hold less than 5 per cent of the shares and still qualify. Investors’ relief has its own separate £10m lifetime limit, so you can claim it on top of any entrepreneurs’ relief you claim.
A few other conditions must be met in order to qualify for investors’ relief:
- Shares must be newly issued, not transferred from another shareholder
- You must hold the shares continuously for at least three years before selling them
- You must be holding the shares for commercial reasons, not simply to avoid tax
- The shares must not be listed on a recognised stock exchange (e.g. London Stock Exchange) at the time of issue. Listings on AIM are permitted.
Can my accountant help me claim entrepreneurs’ and investors’ reliefs?
Claiming these tax reliefs is not always straightforward, and with large sums of money involved, small mistakes or misjudgements can prove very costly. Ask your accountant about obtaining the maximum benefit from entrepreneurs’ relief and investors’ relief, as they will be on top of all the detail.
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