Entrepreneurs Relief - What is it?

This is a tax relief that enables you to sell part, or all of your business (or assets). As a result, you would only pay 10% capital gains tax (CGT) on any profits you have made, up to the value of £10m in total.

If you usually pay the higher 20% capital gains tax, this can mean you could save up to £1m in your lifetime, if you use the entrepreneurs relief.

Assets Qualifying For Entrepreneurs Relief

Business assets and shares are covered under the relief. As a result, both sole traders and partnerships are eligible to claim relief when selling assets used in the business. This is similar to company directors and other shareholders. Company shares can qualify if the company is a trading company or a holding company of a trading group.

You need to meet specific criteria to claim entrepreneurs relief:

For a minimum of two years, you must be an employee and a company director of the company, or a sole trader.

You must own 5% (or more) value shares if you are selling company shares and have at least 5% of the voting rights.

It is not possible to claim entrepreneurs relief on business assets where the business ceased trading over three years ago. You must claim the relief three tears before the sale.

You need to show the business is still ongoing and will continue if you are only selling part of it. It's not possible to sell and claim the entrepreneurs relief on parts of the business that make no money.

It's only possible for the sale of the property to be considered for entrepreneurs relief if its exclusively a business asset that is owned by the business itself and used rent-free.

If rent is paid on the property, then this is considered an investment so would not be classed as an asset for entrepreneurs relief. Again, if you are a property landlord who holds your portfolio in the company structure, this also deems the property sale ineligible for entrepreneurs relief.

The Value Of Entrepreneurs Relief

The entrepreneurs relief can be substantial - up to £1m but you are not able to claim more than this in your lifetime. It can be claimed on assets up to £10m; anything above this is taxed at 20%.

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%. But sales of assets that qualify for entrepreneurs relief attract only basic-rate CGT, so you would pay just 10%.

If you and your spouse/civil partner own the business then you are both entitled to claim the relief; this means you can potentially save £2m in total (this is split with you both claiming on up to £10m of assets etc). However, you need to make sure that you both meet the criteria mentioned above in your own right.

You must check eligibility carefully, so you don't miss out on any entrepreneurs relief. It's also important to note:

• If you're selling either part or all of your business to a larger company, you'll need to check the share value of the business you're selling to. If they buy your business (or part of it) with shares, you'll need to check that your shares do not shrink to under 5% of the capital and voting rights of their company. As a result, when you cash in the shares, you would no longer meet the relief criteria.
• You'll need to check your company share percentage regularly before selling if you own only 5%, you'll want to guarantee it doesn't drop below this threshold before selling all or part of the business.
• Other employees may initiate their share setup. If they decide to do this, your percentage may drop below the required 5% level. The company can protect this from happening by establishing a protocol that the share value is only triggered on the sale date, before the actual sale goes through.

What About Investors Relief?

This is only for those who have no direct connection with the selling company. It offers similar tax benefits and is an extension to the entrepreneurs relief. It is not possible to claim investors relief if you are a director or employee.

Whilst there is no minimum threshold (you can hold less than 5% of the shares) to qualify, it does have a separate £10m limit. This means you can claim it over and above entrepreneurs relief but no more than £10m in your lifetime. However, there are further conditions which you should meet to be eligible:

It is not possible to claim investors relief if the shares are transferred from another share older - the shares must be issued to you.

Before selling the shares, you need to have held them for at least three consecutive years.

You cannot just hold these shares to avoid any tax - they must be held for commercial reasons.

Shares cannot not be listed on a recognised stock exchange (although listings on AIM are allowed).

To claim the maximum benefit available to you, you should speak with your accountant about both entrepreneurs and investors reliefs to avoid any costly mistakes being made during this complex process.