Entrepreneurs’ Relief was introduced in the Financial Act 2008, replacing the previous taper relief. This is an important tax relief and can save persons selling their business and/or shares a huge amount of money in avoided tax payments. It can therefore be hugely beneficial (if the circumstances are right) to take expert employment law advice or business law advice if you think that you can avoid such tax payments.
- What is entrepeneurs’ relief?
- What types of disposal qualify for entrepreneurs’ relief?
- When must a claim for relief be made by?
What is entrepeneurs’ relief?
Any gain that a person makes from their investment in a business is normally taxed at a standard rate of 18%. However, if a person satisfies the requirements of entrepreneurs’ relief (contained within the Taxation of Chargeable Gains Act 1992) then they may be able to qualify for a lower rate of 10% on the first £10 million of any qualifying disposal.
In order for entrepreneurs’ relief to apply there must have been a “Qualifying Business Disposal” through the sale of:
- An interests in a sole trade or partnership; or
- Company shares
What types of disposal qualify for entrepreneurs’ relief?
As above, the interests that potentially qualify for entrepreneurs’ relief are:
- The sale of an interest in a sole trade or partnership; or
- The sale of company shares
However, all sales (or “disposals”) do not qualify immediately for the lower rate – only “Qualifying Business Disposals” do. In order for the disposal to be a “QBD” the following requirements must be met:
The sale of an interest in a sole trade or partnership
The following requirements must be met:
- The disposal of the whole or part of a business, whether it’s disposed as a going concern or following the cessation of the business;
- The interest in the business must have been owned for either 12 months ending with the date of the disposal or with the seller having held the interest for at least 12 months prior to the business’s cessation (and then sold within 3 years of the date of the cessation of the business); and
- The assets being sold must have been used for the purposes of business carried on by an individual or partnership (therefore expressly excluding shares – dealt with below)
The sale of company shares
A disposal of shares in a company may qualify for relief if:
- The company is a “trading company” and the disponer (i.e. the seller of the shares) holds at least a 5% interest which gives them 5% of the voting rights; and
- The disposal takes place with the disponer having held the shares for at 12 months (if shares sold while company is a going concern) or at least 12 months prior to the company’s cessation as a trading company
When must a claim for relief be made by?
A claim for relief must be made on or before the first anniversary of the first 31 January following the tax year in which the qualifying business disposal was made (i.e. by 31 January 2016 if QBD in the 2013/14 tax year).
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