If you’re a business owner planning to sell up or wind up your business, Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) can save you a small fortune on your tax bill. The scheme enables entrepreneurs who are selling all or part of their business to pay just 10% in Capital Gains Tax (CGT) on profits over the lifetime of their business. This 10% CGT rate is considerably less than the 18% (for basic rate income tax payers) or 28% (for higher rate payers) that would otherwise be charged, and business owners can claim up to £10m over their lifetime under the relief scheme.
How to Qualify for Entrepreneurs’ Relief
Entrepreneurs’ Relief started in 2008 after a new flat 18% CGT was announced in the Budget for that year. The idea behind ER was to help business owners who would have paid a lower rate under the now-abolished taper relief when they sold their business. To begin with, the lifetime limit on profits was set at £1m but it has risen since and reached its current limit of £10m in the 2011 Budget.
For a business owner to claim Entrepreneurs’ Relief, they must meet certain conditions. They must be an individual, rather than a company, and work as an officer or employee of that company. In addition, they must own at least 5% of the company and have at least 5% of the voting rights. This minimum 5% ownership must have been in place for at least 12 months prior to claiming Entrepreneur’s Relief, or at least 12 months before the business ceased trading.
Facts You Need to Know
Entrepreneurs’ Relief must be claimed at least 12 months from the 31st January following the tax year in which the business was sold off. Although there is a lifetime ceiling of £10m, there is no limit to the number of times that an entrepreneur can claim ER. All the businesses that an individual sets up in his or her lifetime will be included, however, so once £10m has been claimed, business owners will no longer be entitled to this relief on any new business.
Also important to note is that the spouse of an ER claimant can also claim ER provided they also own at least 5% of the business and work in some capacity there too. This means that if an individual has used up their own lifetime ER limit, they can in theory claim up to a further £10m simply by transferring their shares to their spouse at least a year before they plan to sell the business.
Members’ Voluntary Liquidations (MVLs)
As well as following a sale of their company, business owners can also claim Entrepreneur’s Relief on capital distributions to shareholders when the business is closed down. This can be done either through the Members’ Voluntary Liquidation (MVL) scheme or through an informal winding down procedure. Claiming ER will reduce the amount of Capital Gains Tax owing upon the closing of the business. If you close your company under an MVL scheme, for example, and take all the remaining money in the business bank account as a capital distribution rather than a business dividend, you’ll make huge savings in tax under the Entrepreneur’s Relief scheme.
If you’re considering selling your business in the coming years, talk to a professional accountant or tax adviser to ensure you take full advantage of Entrepreneurs’ Relief while satisfying your legal tax obligations.