Entrepreneurs’ Relief Print

Entrepreneurs’ Relief provides for gains on the disposal of qualifying business assets to be charged at the rate of 10%. There is an upper limit of lifetime gains which may benefit from this reduced rate of CGT, and since 6th April 2011 this has been £10,000,000. Entrepreneurs’ Relief must be claimed by 31st January following the end of the tax year in which the qualifying business disposal is made. The relief may be claimed where the sale relates to the material disposal of business assets. Such disposals are defined as:

  • Shares or securities in a trading company of which the vendor is an officer or employee who holds at least 5% of the ordinary share capital, and that holding gives him at least 5% of the voting rights in the company; or
  • The entire business, or part of the entire business carried on by an individual, either solely, or in partnership, or
  • Assets of a business in use at the time at which a business ceases to be carried on by the individual, either solely or in partnership. From 3 December 2014 relief is denied where a sole trader or partnership transfers goodwill to a related close company.
  • The relief will be due provided the asset has been held for at least 1 year.
  • Any shares acquired on the exercise of a qualifying EMI option (or qualifying replacement option) on or after 6 April 2012, provided that the date of grant of the option was not less than 1 year before the date of disposal of the shares. Throughout the period of 1 year prior to the disposal, the company must be a trading company and the individual must be an employee or officer of the company.

Assets such as land and buildings let to an unlisted company, individual, or partnership do not qualify for Entrepreneurs’ Relief.

Example:

John, a higher rate taxpayer, is an employee and 10% shareholder of a trading company. He acquired his 10% shareholding in the company in May 1990 at a cost of £100,000. He sold his shares in September 2014 for £8,000,000. He has other gains which use up his annual exemption, and has not used any part of his Entrepreneurs’ Relief lifetime allowance. His CGT liability on the shares is calculated as follows:

 

£
Sale Proceeds 8,000,000
Deduct: Original Cost 100,000
Taxable gain 7,900,000
Tax thereon @ 10% 790,000

Following this disposal John has unused Entrepreneurs’ Relief of £2,100,000 available for offset against future disposals of qualifying business assets. Entrepreneurs’ Relief may also be claimed in respect of a disposal associated with a material disposal of business assets where:

  • The disposal is made as part of the individual’s withdrawal from participation in the business of the partnership or company, and
  • Throughout the period of 1 year immediately preceding the disposal of the business assets, or the cessation of the business, the assets are used for the purposes of the business.

Where commercial property owned by a shareholder is disposed of as part of a material disposal of the individual’s shareholding, Entrepreneurs’ Relief is not available if a commercial rent is paid for the use of the premises. The restriction is based on the market value of the rent received, so a proportion of the relief may be due where the rent paid is less than full market value. There is no requirement for the commercial property to be disposed of to the same person acquiring the shares.  Entrepreneurs’ relief is being extended to allow gains which are eligible for Entrepreneurs’ relief, but which are instead deferred into investments which qualify for either EIS Deferral Relief, or Social Investment Tax Relief to remain eligible for Entrepreneurs’ relief when the subsequent investment is realised. This has effect for gains deferred into either of the above schemes on or after 3 December 2014.

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