Entrepreneurs’ relief

Entrepreneurs’ relief is a relief from capital gains tax that is available to individuals, and in certain cases trustees.

Entrepreneurs’ relief applies a capital gains tax rate of 10% to the first £10million of qualifying capital gain, this is after deduction of any related losses realised on or after 6 April 2011. This only applies if the lifetime allowance has not been used by claims for entrepreneurs’ relief on earlier disposals. For trustees, the limit is generally set by the qualifying beneficiary’s lifetime limit.

Entrepreneurs’ relief must be claimed. The claim must be made on or before the first anniversary of 31 January after the tax year of disposal. Consequently, if a disposal or deemed disposal was made on 1 May 2016, within the tax year of 2016/17, relief must be claimed on or before 31 January 2019.

What are qualifying capital gains?

Qualifying capital gains arise from the disposal by an individual of

• shares in or securities of a personal trading company or holding company of a trading group. For at least one year up to the date of the disposal, the individual must have
  • held at least 5% of the ordinary share capital of the company, allowing him to exercise at least 5% of the voting rights
  • been a director or employee of the company, or a company in the same group. Relief may be available even if the company had ceased trading. Special rules apply for shares acquired by employees on exercise of options under the Enterprise Management Incentive scheme.
• The whole or part of a business as a going concern
  • the individual must have owned the business, whether as a sole trader or in partnership, for at least one year up to the date of the disposal
  • shares and securities and other assets held by the business for investment purposes or assets not used for the purposes of the business will not qualify for relief. However, disposals by sole traders when converting to a partnership, part disposals by existing partners when a new partner joins a partnership or where there is a change in profit-sharing ratios and full disposals by partners will qualify.

Assets formerly used in a qualifying business which simply stopped, rather than being sold as a going concern

The assets must be sold within three years after the business has ceased trading. The individual, whether acting as a sole trader or in partnership, must have owned the business for at least one year. This year ends with the date on which the business ceased trading.

Personal assets used by a trading company or partnership

The assets must be owned by someone qualifying for the relief on a disposal of the business, shares or other securities in the company.

The individual must be withdrawing from the business i.e. reducing his share in the partnership capital and profits, or significantly reducing his shareholding in a company (anti-avoidance provisions apply).

The asset must have been used by the company or partnership for its business purposes for at least one year up to the date of the disposal of the business or shares (or other securities) and owned by the individual for three years.

Shares or loan notes received as consideration for shares

To take advantage of entrepreneurs’ relief, a seller can elect to disapply the normal rules and include the value of the shares and loan notes received in the computation of the taxable gain.  Making this election will mean that tax must be paid on 31 January following the tax year in which he sells his personal company shares.

Earn-outs

Claiming entrepreneurs’ relief may affect how earn-outs on a share sale should be structured.  A seller whose earn-out right can be satisfied only in shares or loan notes may prefer to elect to crystallise a tax charge at the time of the share sale rather than defer the gain.

Lifetime limit

The lifetime limit for entrepreneurs’ relief increased from £5million to £10million on 6 April 2011.