Entrepreneurs’ Relief Explained: Selling Your Business Shares

Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, offers a substantial advantage for business owners by lowering the Capital Gains Tax (CGT) on the sale of a business or shares. Introduced in 2008 to boost entrepreneurship, this relief allows you to benefit from a reduced CGT rate of 10% on gains up to £1 million. It’s designed not only as a reward for your dedication but also to make the transition of selling or gifting your business more financially favorable.

Entrepreneurs’ Relief can reduce your Capital Gains Tax (CGT) when you sell certain business assets or shares. To be eligible for Entrepreneurs’ Relief, you must have owned the shares or assets for at least two years before the date of disposal. You must also be a sole trader or business partner, or have at least 5% of the shares and voting rights in a company. The relief is available for up to £10 million of lifetime gains, so you could save up to £1 million in CGT. However, it’s important to note that Entrepreneurs’ Relief only applies to certain business assets and shares, so it’s important to check whether you’re eligible before you sell your business.

Understanding Entrepreneurs’ Relief

Definition and Purpose

If you are a business owner looking to sell your business or shares, you may be eligible for Entrepreneurs’ Relief. This is a UK tax relief that was introduced in 2008 to encourage entrepreneurship and reward business owners for their hard work. It allows you to pay less Capital Gains Tax (CGT) when you sell all or part of your business, including shares, up to a lifetime limit of £1 million.

Entrepreneurs’ Relief is available to individuals and certain trustees who meet the eligibility criteria. To qualify, you must have owned the business or shares for at least two years before the date of disposal. The relief applies to qualifying business assets, including shares in a trading company, or assets used in a business that you have owned for at least two years.

History and Evolution

Entrepreneurs’ Relief has evolved over the years since its introduction in 2008. It was initially introduced with a lifetime limit of £1 million, but this was increased to £2 million in 2010 and then to £10 million in 2011. In 2020, the lifetime limit was reduced back to £1 million.

In addition to Entrepreneurs’ Relief, there is also Investors’ Relief, which is a similar relief aimed at investors rather than business owners. If you are eligible for Investors’ Relief, you will pay tax at a rate of 10% on any gains you make, up to a lifetime limit of £10 million.

It is important to note that Entrepreneurs’ Relief is subject to certain conditions and restrictions. For example, it only applies to gains made on or after 6 April 2008, and there are restrictions on how much of your business you can sell to qualify for the relief. You should seek professional advice to ensure that you meet the eligibility criteria and to understand the tax implications of selling your business or shares.

Eligibility Criteria

To qualify for Entrepreneurs’ Relief, you must meet certain conditions. These conditions are divided into three categories: Qualifying Conditions, Personal Company Requirements, and Shareholding Criteria.

Qualifying Conditions

To be eligible for Entrepreneurs’ Relief, you must meet the following qualifying conditions:

• You must be an individual, not a company or other type of business entity.
• You must have owned the shares for at least two years before the date of disposal.
• The shares must be in a trading company or the holding company of a trading group.
• You must be disposing of all or part of your shareholding in the company.

Personal Company Requirements

In addition to the qualifying conditions, your company must meet the following requirements to be considered a personal company:

• You must be an officer or employee of the company, or of a company in the same group.
• You must hold at least 5% of the ordinary share capital of the company.
• You must be entitled to at least 5% of the voting rights in the company.

Shareholding Criteria

To be eligible for Entrepreneurs’ Relief, you must meet the following shareholding criteria:

• You must hold ordinary shares in the company, not preference shares or loan notes.
• The shares must be fully paid up and have no special rights attached to them.
• You must not have any arrangements in place that would result in you disposing of your shares to a third party immediately after the disposal.

Meeting these eligibility criteria can help you qualify for Entrepreneurs’ Relief when selling shares in your business.

Calculating the Relief

When selling shares in your business, Entrepreneurs’ Relief can significantly reduce the amount of Capital Gains Tax (CGT) you’ll need to pay. Here, we’ll explain how to calculate the relief.

Lifetime Limit

Entrepreneurs’ Relief has a lifetime limit of £1 million. This means that you can claim the relief on gains of up to £1 million over your lifetime. Any gains over this limit will be subject to the standard CGT rate.

Tax Rate and Reductions

When you sell qualifying business assets or shares, you can claim Entrepreneurs’ Relief and pay a reduced CGT rate of 10%. This is much lower than the standard CGT rate of 20%.

To calculate the relief, you need to work out your total gains from selling the assets or shares. Then, deduct any allowable losses and the lifetime limit of £1 million. The remaining figure is the amount of gain that you can claim Entrepreneurs’ Relief on.

For example, if you make a gain of £1.5 million from selling your business, you can claim Entrepreneurs’ Relief on £1 million of that gain. The remaining £500,000 will be taxed at the standard CGT rate.

By claiming Entrepreneurs’ Relief, you can save a significant amount of tax on your profits. It’s important to note that you must meet certain eligibility criteria to claim the relief, so be sure to check with a tax professional or refer to GOV.UK for more information.

Claiming the Relief

If you are eligible for Entrepreneurs’ Relief, you can claim it by following a few simple steps. Here are some key points to keep in mind:

Process and Deadlines

To claim Entrepreneurs’ Relief, you must fill out the appropriate sections of your Self Assessment tax return. You will need to provide details about the shares or assets you have sold, as well as the date of the sale and the amount you received.

There are strict deadlines for claiming Entrepreneurs’ Relief, so make sure you don’t miss them. You must make your claim within two years of the end of the tax year in which you sold the shares or assets. For example, if you sold shares in your business during the 2023-24 tax year, you must make your claim by 5 April 2026.

If you miss the deadline, you may still be able to claim Entrepreneurs’ Relief in certain circumstances. For example, if you were not aware that you were eligible for the relief at the time of the sale, you may be able to claim up to four years after the end of the tax year in which you sold the shares or assets. However, you should speak to a tax adviser or accountant to discuss your options.

HMRC Documentation

Once you have completed your Self Assessment tax return, you should submit it to HM Revenue and Customs (HMRC) along with any supporting documentation. This may include share certificates, contracts, and other relevant paperwork.

It is important to ensure that all of your documentation is accurate and up-to-date, as any errors or omissions could delay the processing of your claim. You should also keep copies of all your paperwork for your own records.

If you have any questions or concerns about claiming Entrepreneurs’ Relief, you should speak to a tax adviser or accountant. They will be able to provide you with expert advice and guidance, and help you to ensure that your claim is processed correctly and on time.

Impact on Different Business Structures

The implications of Entrepreneurs’ Relief can differ markedly across various business structures, each with its unique considerations and potential benefits. Whether you operate as a sole trader, partnership, or limited company, understanding how Entrepreneurs’ Relief applies to you is crucial. For targeted advice and services tailored to your specific business structure, from Sole Trader Accounting to Limited Company Accountants, our expert team is here to guide you through the intricacies of this tax relief.

Sole Traders and Partnerships

If you’re a sole trader or in a partnership, you may be eligible for Entrepreneurs’ Relief when selling your business. To qualify, you must have owned the business for at least 2 years up to the date of sale. If you meet this requirement, you may be able to claim a reduced Capital Gains Tax (CGT) rate of 10% on the gain you make from selling your business.

Limited Companies and Shareholders

If you’re a shareholder in a limited company, you may also be eligible for Entrepreneurs’ Relief when selling your shares. To qualify, you must have owned the shares for at least 2 years up to the date of sale. If you meet this requirement, you may be able to claim a reduced CGT rate of 10% on the gain you make from selling your shares.

However, if you’re a shareholder in a holding company that owns a trading company, you may not be eligible for Entrepreneurs’ Relief. This is because the trading company must be at least 80% owned by the holding company for you to qualify.

It’s also worth noting that if you’re a shareholder in a trading company, you must be an officer or employee of the company to qualify for Entrepreneurs’ Relief. If you’re not, you may not be eligible for the relief.

Special Cases and Considerations

When it comes to Entrepreneurs’ Relief, there are some special cases and considerations that you need to be aware of. These include associated disposals, joint ventures and partnerships, and trusts and trustees.

Associated Disposals

An associated disposal is when you dispose of an asset that is associated with your shares in a company. For example, if you sell your shares in a company and also sell the building that the company owns, this would be considered an associated disposal.

If you have an associated disposal, you need to be aware that the gain on the disposal will be included in the calculation of your lifetime limit for Entrepreneurs’ Relief.

Joint Ventures and Partnerships

If you have a joint venture or partnership interest, you may be able to claim Entrepreneurs’ Relief on the disposal of your interest. However, there are some conditions that need to be met.

Firstly, you must have held your interest for at least two years before the disposal. Secondly, you must have been entitled to at least 5% of the profits and assets of the joint venture or partnership.

Trusts and Trustees

If you are a trustee and you dispose of shares in a company, you may be able to claim Entrepreneurs’ Relief. However, there are some conditions that need to be met.

Firstly, the shares must have been held for at least two years before the disposal. Secondly, the company must be a trading company or the holding company of a trading group. Finally, the beneficiary of the trust must be entitled to at least 25% of the proceeds of the disposal.

Common Misconceptions and Pitfalls

When it comes to Entrepreneurs’ Relief, there are a number of misconceptions and pitfalls that can trip up business owners. In this section, we’ll explore some of the most common issues that arise and how you can avoid them.

Misunderstanding Eligibility

One of the biggest misconceptions about Entrepreneurs’ Relief is that it is available to all business owners. In fact, there are a number of eligibility criteria that must be met in order to qualify for the relief. For example, you must have owned the shares for at least two years and the company must be a trading company or the holding company of a trading group. If you are unsure whether you meet the eligibility criteria, it is important to seek professional advice before making any decisions.

Incorrect Calculation Errors

Another common pitfall is making errors when calculating the amount of relief that you are entitled to. Entrepreneurs’ Relief can be a complex area, and there are a number of different rules and calculations that need to be taken into account. For example, the lifetime limit for Entrepreneurs’ Relief is currently £1 million, so if you have already claimed relief on previous disposals, you may need to adjust your calculations accordingly. It is important to take the time to ensure that your calculations are accurate, as mistakes can be costly.

Alternatives to Entrepreneurs’ Relief

If you are not eligible for Entrepreneurs’ Relief, there are other Capital Gains Tax (CGT) reliefs that you may be able to claim. In this section, we will discuss two other CGT reliefs that you may consider.

Business Asset Disposal Relief

Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) is a CGT relief that can reduce the amount of tax you pay when you sell certain business assets or shares. It is similar to Entrepreneurs’ Relief, but it has a broader scope and can be claimed by a wider range of taxpayers.

To be eligible for Business Asset Disposal Relief, you must meet certain conditions, including:

• You must be a sole trader, partner, or have at least 5% of the shares and voting rights in a qualifying company.
• You must have owned the business assets or shares for at least two years before the sale.
• The assets or shares must have been used in the business for at least two years before the sale.

If you meet these conditions, you may be able to claim Business Asset Disposal Relief and pay a reduced rate of CGT on the sale of your business assets or shares.

Other CGT Reliefs

There are other CGT reliefs that you may be able to claim if you are not eligible for Entrepreneurs’ Relief or Business Asset Disposal Relief. These include:

• Gift Hold-Over Relief: If you give away business assets or shares to someone else, you may be able to claim Gift Hold-Over Relief and defer paying CGT until the recipient sells the assets or shares.
• Rollover Relief: If you sell business assets and use the proceeds to buy new assets, you may be able to claim Rollover Relief and defer paying CGT until you sell the new assets.
• Holdover Relief: If you give away assets that are not used in a business, you may be able to claim Holdover Relief and defer paying CGT until the recipient sells the assets.

Each of these reliefs has specific conditions that must be met in order to qualify. You should consult with a tax professional to determine if you are eligible for any of these reliefs and how they may apply to your specific situation.

Seeking Professional Advice

In the complex landscape of business sales and tax reliefs, securing professional guidance is paramount to navigate decisions and maximise benefits effectively. Whether you’re evaluating the sale of shares or exploring tax relief opportunities, a tax adviser’s expertise can be invaluable. Our range of services caters to various business needs, from Partnership Accountancy Services to Xero Accountants, ensuring tailored support for your unique situation.

When to Consult a Tax Adviser

If you are considering selling shares in your business, it is advisable to consult a tax adviser as early as possible. They can help you to understand the tax implications of the sale, and advise you on the most tax-efficient way to structure the transaction.

A tax adviser can also help you to identify any tax reliefs that you may be eligible for, such as Entrepreneurs’ Relief. They can help you to calculate your capital gains tax liability, and advise you on any steps you can take to reduce your tax bill.

Comprehensive Accountancy Services

As you navigate the intricacies of Entrepreneurs’ Relief and its implications for your business, consider the value of comprehensive accountancy services. From ensuring compliance to optimising tax strategies, our specialised services cover the full spectrum of needs. Explore our Bookkeeping Services and Management Reports for a deeper understanding and enhanced financial management. Leveraging professional accountancy support can significantly ease the process and improve outcomes.