On the Second Day of Christmas the Taxman gave to me … a relief for selling my compan-ee!
Entrepreneurs’ Relief (‘ER’) is a 10% capital gains tax rate available on the sale of certain business assets. Ultimately, it could save you as much as #1.8m so it is well worth planning in advance and seeking professional advice to ensure you meet the necessary conditions.
The relief is available on the sale of interests held in trading businesses, be it a sole trader, a partnership interest or shares in a limited company. The relief is not available for interests held in investment businesses nor is it available on the sale of individual business assets.
A sole trader or partner selling his or her interest in a trading business will qualify for ER if they have owned that business throughout the twelve month period prior to the sale.
A shareholder selling his or her shares in a limited company will qualify for ER if, throughout the twelve month period prior to the sale:
a) the company is a trading company or the holding company of a trading group;
b) the shareholder holds at least 5% of the ordinary share capital and voting rights of the company; and
c) the shareholder is an officer or employee of the company.
It is also possible to obtain ER on the sale of shares acquired through certain share options, even if you do not hold 5% or have held the shares for less than one year.
ER is available where a business ceases to trade and the assets used in that business are then sold. In this scenario, a sole trader or partner must have owned the business throughout the one year period prior to cessation of the trade and the assets must then be disposed of within three years of the date the trade ceased.
Where a limited company ceases to trade, the above conditions must be satisfied in the twelve months prior to cessation of the trade and then the winding up of the company must be completed within three years of that date.
ER is extended to the sale of assets, such as business premises, that are owned personally by partners or shareholders but are used in the trading business carried on by the partnership or limited company. In these circumstances, the sale of the asset must be associated with a sale by the individual of their partnership interest or shares, as part of a withdrawal by the partner or shareholder from that business. The asset concerned must also have been used in that business throughout the twelve months prior to the sale of the partnership interest or shares or the cessation of the trade.
ER applies to the first #10m of qualifying gains in a person’s lifetime. Gains over and above this limit will be taxed at 18% or 28% depending on your personal circumstances.