Entrepreneurs' relief - how to qualify
Entrepreneurs' relief is a welcome concession to the small business
community who felt that the loss of business taper relief was an unfair tax on those selling their businesses to fund their retirement.
After the June 2010 Budget, the relief was worth a maximum of £900k for a higher income earner as the first £5m capital gain on the sale of a business is liable to only pay CGT at 10%. Of course, with the old business taper relief system, there was no upper
limit and billion pound gains were being taxed at 10%, with the private equity industry benefiting the most.
In the March 2011 Budget, the lifetime limit for Entrepreneurs' Relief was lifted to £10 million, an effective savings of up to £800,000.
Let's look at an example of how Entrepreneur's Relief works in practice.
On 18th April, 2011, Barry Boyle sells the technology company that he built from scratch for £15 million.
Capital Gains Tax is due on £14,989,400 (£15m less Annual Exempt Amount of £10,600).
The first £10 million of this gain qualifies for Entrepreneurs' Relief, and he has made no other gains or losses.
The CGT on £10m at the Entrepreneurs' rate is £1,000,000. The CGT on the balance of £4,989,400 at 28 per cent (as Barry is a higher income earner) is £1,397,032.
Barry's total capital gains tax payable on the sale of his business is therefore £1,000,000 + £1,397,032 = £2,397,032.
Without Entrepreneurs' Relief he would have had to pay capital gains tax of £4,197,032 i.e. an extra £1,800,000.
How to access Entrepreneurs' Relief
Entrepreneurs' relief can be applied to qualifying individual or trust business gains.
It has to be claimed by the individual or, in the case of a disposal of trust business assets,
jointly by the trustees and the qualifying beneficiary. The deadline for making the claim is the first anniversary of the
31st January following the tax year in which the qualifying business disposal is made.
For a gain to qualify for Entrepreneurs' relief, the disposal must meet the qualifying business asset disposal criteria.
Generally the qualifying conditions for Entrepreneurs' relief are stricter than for business asset taper relief.
Certain conditions must be met with respect to the significance of the disposal and the period of time that the taxpayer has held the asset.
Disposal of an asset used for business purposes without there also being a disposal of the whole or part
of that business will not qualify for relief. There are 3 categories of qualifying business proposals.
- A material disposal of a business asset
- A disposal of trust business assets
- A disposal associated with the relevant material disposal.
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