Everyone starts their business with lots of dreams and a matching amount of elbow grease, but sometimes things don’t work out. If you are one of the entrepreneurs getting ready to say goodbye to your UK-based business, then a particular section of the British tax system – called Entrepreneurs’ Relief (ER) – could save you a ton of tax.
Entrepreneurs’ Relief (ER) is a part of the British tax laws that allow you to pay less CGT (Capital Gains Tax) when you sell or give away your company or a part of it.
What are the general tax liabilities for UK residents when they sell their businesses?
If you are disposing of your business or a part of it for a profit, then you are liable to pay the government capital gains tax (CGT). CGT is taxed only on the profit you make and not on the entire amount received on sale.
The CGT is calculated on the personal income of the individual – people with average incomes are charged at 10%, but a higher income attracts a 20% CGT rate.
Here Entrepreneurs’ Relief comes in handy!
Does Entrepreneurs’ Relief have eligibility criteria?
Well, yes. Claiming Entrepreneurs’ Relief requires you to meet some very broad conditions. These are –
- You must be a UK resident – non-residents don’t have to pay any capital gains tax even if their business assets are in the UK (unless these assets are used for trading).
- You should be disposing of/selling the business, its assets, shares, or securities – This refers to closing the business, selling its assets or shares, giving them away as a gift, or swapping them for other assets.
(if you are selling shares and securities, then to qualify for ER you must –
- hold a minimum of 5% of the shares and the voting rights.
- be worth at least 5% of the company’s distributable profits and assets when the company is wound up.
- have been an employee or an officeholder (like a director, board member, or company secretary) for at least two years before the sale or disposal.
- You have owned the business or asset for at least two years – If you’re closing down your business, then ownership extends to 3 years before the date of closure.
- Your company’s primary function is trading related – or at the very least, it should be a holding company of a trading group. This means that you should not be engaged in non-trading activities such as property development, investments, or licencing arrangements. In general, to qualify as a trading company, no more than 20% of a company’s turnover should derive from investments, not more than 20% of its assets should be classified as non-trading, and no more than 20% of management time should be spent on non-trading activities.
How much Entrepreneurs’ Relief are you eligible for?
In your lifetime, you can only claim tax relief up to £10 million. You can claim the ER multiple times until you reach the £10 million limit. Once you reach the limit, you will be charged at the standard CGT rate applicable to you.
To find out how much ER you can claim, you need to follow this simple formula –
- Figure out all the gains from selling the assets.
- Deduct all qualifying losses to find out the final taxable gain
- Deduct your tax-free allowance (for CGT it’s £12,000 in the tax year 2019/2020)
- What’s left is taxed at 10%
What’s next? How do you claim Entrepreneurs’ Relief?
There are two ways to claim ER –
- You can do it through your Self Assessment tax return either online or through a printed form.
- Or you can fill in Section A of the Entrepreneurs’ Relief help sheet.
The deadline for claiming Entrepreneurs’ Relief is two years after the sale starting from January 31 following the tax year in which the business was sold. Here’s a chart you can follow to understand the concept –
|Tax year ended||Deadline to claim|
|April 5, 2020 (2019-2020 tax year)||January 31, 2022|
|April 5, 2019 (2018-2019 tax year)||January 31, 2021|
|April 5, 2018 (2017-2018 tax year)||January 31, 2020|
Find out your Entrepreneurs’ Relief eligibility today, don’t miss out on the opportunity to save some money. You never know, what you save with ER might fund your next venture!
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