24 Mar
Entrepreneurs’ Relief: This is what you need to know
A basic understanding of Entrepreneurs’ Relief
One of the most appealing benefits available to business owners and entrepreneurs is Entrepreneurs’ Relief. Entrepreneurs’ Relief allows individuals to pay 10% tax on income made on qualifying assets. Payable Capital Gains Tax for entrepreneurs reduces if they sell or ‘dispose of’ some or all parts of their business.
This article will help you gain an insight into Entrepreneurs’ Relief and what factors make you eligible to claim it. If you still have any queries regarding the subject, you can always speak to a startup accountant to gain more knowledge about it.
Video: Various ways you can lose your Entrepreneurs’ Relief
Watch this video to find out all the ways that can cause you to lose your Entrepreneurs’ Relief.
How do you qualify for Entrepreneurs’ Relief if you sell some or all parts of your business?
Entrepreneurs’ Relief can be claimed if the following two conditions apply for at least a period of 2 years up to the date of sale of the business.
- If you operate as a sole trader or business partner.
- If you have owned the business for 2 years or more.
Remember: The same conditions will be applicable if you are terminating your business. To qualify for the Entrepreneurs’ Relief, you must dispose off all your business assets within the first 3 years after closing the business.
How do you qualify for Entrepreneurs’ Relief if you are selling shares or securities?
Entrepreneurs’ Relief can be claimed if the following two conditions apply for at least a period of 2 years up to the date of sale of the business.
- If you are working as an employee or are the company’s office holder
- If the company is involved in trading activities and not in non-trading activities, or it is a holding firm of a trading group.
Other rules may apply as well, but their application depends on whether the shares are from an Enterprise Management Incentive (EMI) or not. We will discuss these two conditions in detail below.
You may hire an accountant or speak to them to learn more about how you can rightfully claim Entrepreneurs’ Relief when selling shares or securities.
Related: Learn how to issue shares using our guide.
What if the shares are from an Enterprise Management Incentive (EMI)?
In order to qualify, the following conditions must apply if the shares are from an Enterprise Management Incentive (EMI)
- If the shares have been bought after 5th April 2013.
- If you have been provided with the opportunity to purchase them at least 2 years before selling them.
What if the shares are not from an Enterprise Management Incentive (EMI)?
You have to ensure that the business is a ‘personal company’ for at least 2 years before selling the shares in order to qualify for relief. A business must fulfil the following conditions if it has to qualify.
- If you have at least 5% ownership in shares and a 5% influence in voting rights.
- In case you either have 5% entitlement to the profits to be distributed and assets when winding up the company or at least 5% entitlement to disposal proceeds if the firm is sold.
If your shares worth is below 5% due to the issuance of multiple shares. Then you are still liable to claim Entrepreneurs’ Relief.
You can either choose or ‘elect’ to be considered as if you have sold and repurchased your shares before the new shares were released. This can help acquire gains to claim Entrepreneurs’ Relief. You also need to choose or ‘elect’ to delay paying tax on the gains made until you sell your shares.
To complete the process:
- You should complete the Capital Gain summary’s additional information section of your tax returns.
- In case you don’t have an annual return to file you can also write to HMRC.
Related: Learn more about dividend taxation by reading our blog
How do you qualify if your company stops trading activities?
You can qualify for Entrepreneurs’ Relief even if your company terminates a trading activity. To qualify, you must sell your shares within the first 3 years after terminating trading activities.
How do you qualify if you are selling assets that you lent to the company?
In this case, you may qualify for the Entrepreneur’s Relief if the following conditions are met:
- You have ownership over the assets which you allowed the personal company or business partners to use for a period of at least one year up to the date you sold your business or shares. (In case the business has closed down- the date you officially closed the business will be considered)
- You have already sold:
- At least 5% of your shares in the business partnership.
- At least 5% of the shares you own in the personal company.
Do you qualify if you are a trustee?
You can qualify for the Entrepreneur’s Relief if you are a trustee selling assets provided to the trust.
How to calculate your tax?
The process of working out your tax depends entirely upon the eligibility of Entrepreneurs’ Relief on your gains.
Accurate tax estimation can get very confusing, so it’s advisable to speak to a tax accountant to help you.
What if all of the gains you made qualify for Entrepreneurs’ Relief?
In case all the gains you made qualify for Entrepreneurs’ Relief, follow the steps below:
- Make an estimation of the gains made from all qualifying assets.
- Once done, add all the gains after deducting qualifying losses to calculate the amount of total taxable gain that’s eligible for Entrepreneurs’ Relief.
- You will then have to subtract your tax-free allowance from the amount calculated above.
There is an amount of 10% tax that needs to be paid on the amount calculated in the last step.
There is a limit to how much gain is allowed to be taxed at 10% in your lifetime under entrepreneurs’ relief, and this has recently been reduced in the latest 2020 budget, from £10 million to £1 million.
How much tax do you have to pay if you have other gains?
The amount of tax you have pay on other gains depends upon:
- The actual time the gain was made.
- The income tax rate applicable to you.
What about the individuals who pay a higher Income Tax Rate?
You are liable to pay a 28% tax on any gains that fail to qualify for Entrepreneurs’ Relief, before 6 April 2016.
For gains that don’t qualify for Entrepreneurs’ Relief and are made after 6th April 2016, the following conditions apply:
- You will have to pay 28% on earnings made from residential property.
- You will have to pay 10% on earnings made from other chargeable assets.
What about the individuals who pay a basic Income Tax Rate?
If you are an individual who pays tax at a basic income tax rate, you will have to estimate the tax rate you’ll pay on gains that do not qualify for Entrepreneurs’ Relief.
The following are the steps to follow to help estimate the tax rate:
- Estimate the amount of taxable income you have by subtracting your personal allowance and all the tax reliefs you are qualified for.
- Subtract the resulting amount from the current year’s basic rate tax band in which you made the gains. You will then get the amount of basic rate band which can be used against your gains.
- The next step is to calculate your total taxable gain.
- You will have to use your basic rate band against gains that qualify for Entrepreneurs’ Relief. You will be liable to pay 10% on all of these gains.
- After using the basic rate band against eligible gains, you will have to use the remaining basic rate band against any other gains. For gains made before 6th April 2016, you will have to pay 18% on other gains, and for gains made after 6th April 2016. You will have to pay 18% on earnings from residential property and 20% on earnings made from other chargeable assets.
- If the earnings exceed the basic rate band, you will be liable to pay 28% on gains made before 6th April 2016. If the gains were made after 6th April 2016, you will be liable to 28% on earnings from residential property and 20% on earnings from other chargeable assets.
- In case you have a tax-free allowance, then you can use this allowance against the gains which will be taxed at the highest rates (for instance, in cases where you will have to pay 28% tax).
How can you claim Entrepreneurs’ Relief?
There are two ways through which you can claim Entrepreneurs’ Relief:
- You can claim through your Self Assessment tax return.
- You can claim by completing Section A of the Entrepreneurs’ Relief helpsheet.
Is there any limit on how many times you can claim Entrepreneurs’ Relief?
No, there is no limit to how many times you are allowed to claim Entrepreneurs’ Relief.
Is there any limit on the amount of Entrepreneurs’ Relief you can claim?
Yes, you are allowed to claim up to £10 million (changed to £1 million as announced in the new budget) of Entrepreneurs’ Relief during the course of your life.
Clear House Accountants are professional Accountants in London with years of experience in handling tax affairs for businesses regardless of their size. Our tax accountants are trained to ensure they find schemes that can help businesses claim reliefs which can help them reduce the amount of tax to pay.
Author Bio
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes