What is Entrepreneurs' Relief?

Entrepreneurs who sell businesses must pay capital gains tax (CGT) on money generated by the sale. On 6 April 2008, however, the government introduced a form of tax relief on CGT. Known as entrepreneurs’ relief, it reduces the tax entrepreneurs pay.

Availability

Entrepreneurs’ relief is available for gains made following the sale of all or part of a business, and gains made from the sale of any assets when a business ceases to trade.

The Amount and Time Period

The government previously levied CGT at 18% across the board. Under entrepreneurs’ relief, the first £1 million of gains has an effective rate of 10%. After this, 18% applies.

There’s no limit to the claims an entrepreneur can make for the tax relief. The total entrepreneurs’ relief over the course of a lifetime, however, must not exceed £1 million of gains. The current tax-free annual exemption (£10,100) remains in place. The former taper relief and indexation allowance have gone.

The Single 18% Rate

CGT is a single rate of 18%. The entrepreneurs’ relief, however, reduces an individual’s first £1 million of gains by 4/9ths. The effective rate for this £1 million is therefore 5/9ths of 18% = 10%.

Example

An entrepreneur sells a business. After allowable losses and the annual exemption amount of £10,100, the gains come to £360,000.

The entrepreneur claims entrepreneurs’ relief for the first time. HM Revenue & Customs (HMRC) reduce the £360,000 by 4/9ths (£160,000).

The remaining balance of gains is £360,000 - £160,000 = £200,000, the figure HMRC use to calculate CGT.

18% of £200,000 = £36,000 CGT. This is the equivalent of 10% of the total gains from the business.

Without entrepreneurs’ relief, the entrepreneur would be liable to pay 18% of £360,000 = £64,800.

Conditions

Apart from the £1 million gains maximum for an entrepreneur’s lifetime, there are certain other qualifying conditions related to the tax relief. Entrepreneurs must meet these conditions for one year before they can request entrepreneurs’ relief.

The relief applies to gains from the disposal of all or part of a trading business. A trading business includes vocational and professional work, but excludes a property letting business (apart from furnished holiday lettings). An entrepreneur may have run the business alone or as one member of a partnership agreement.

If an entrepreneur closes rather than sells a business, it’s still possible to claim entrepreneurs’ relief on the gains from assets disposed of within the following three years.

An entrepreneur can also claim relief on the sale of shares and securities in a trading company, or the holding company of a trading group. An entrepreneur must, however, have been an employee or officer of the business (or of a company in the same group); owned at least 5% of the company’s ordinary share capital; and have had at least 5% of the voting rights.

Associated Disposal

If an entrepreneur sells other assets used as part of a company’s business in addition to shares and securities, HMRC refer to this as “associated disposal”. In these circumstances, an entrepreneur can claim relief on the assets as well as the shares.