Entrepreneurs’ Relief is a very attractive tax benefit since it offers a reduced tax rate of 10% rather than the 18% (for basic rate income tax payers) or 28% (for higher rate payers). It is geared towards relieving the tax burden for those who wish to sell their company and is available for up to £10 million lifetime gains. However, it is not automatically given and not everyone is entitled to it.
What is the criteria for Entrepreneurs’ Relief?
To qualify, you must:
- be an individual, rather than a company
- work as an officer or employee of that company
- own at least 5% of the company and have at least 5% of the voting rights
According to gov.uk, you’ll qualify if you dispose or sell of any of the following:
- all or part of your business as a sole trader or business partner – including the business’s 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 got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013
- assets you lent to your business or personal company.
For Entrepreneurs’ Relief to be applicable, the criteria must be met for at least 12 months prior to claiming Entrepreneurs’ Relief. It must also be claimed at least 12 months from 31 January following the tax year in which the business was sold or dissolved.
Can Entrepreneurs’ Relief be claimed more than once?
There is no limit to the number of times that Entrepreneurs’ Relief can be claimed. So, if you have previously claimed Entrepreneurs’ Relief you can do so again on new business. You can do this any number of times until you hit your lifetime limit of £10m. Once this has been reached you can do longer claim Entrepreneurs’ Relief on any new business.
However, the spouse of a claimant of Entrepreneurs’ Relief can also claim tax relief if they own at least 5% of the business and also work in some capacity within the business. So, an Entrepreneurs’ Relief claimant who has reached their limit can, in effect, double their £10m lifetime limit by transferring their shares to their spouse. This must be done at least 12 months before the business is sold or dissolved.
Members’ Voluntary Liquidation (MVL)
Here at Clarke Bell, most of the business owners who have done a Members’ Voluntary Liquidation (MVL) with us did qualify for Entrepreneurs’ Relief. This meant the MVL was the most tax-efficient way for them to close down their solvent business.