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CGT – Entrepreneurs Relief

27th May 2013

Entrepreneurs Relief is a CGT relief available to taxpayers who sell or give away their businesses. Effectively, qualifying gains are taxed at 10%, rather than the normal rates (18%, 28%).

It is available to the following people:

  • Sole traders and partners selling the whole or part of their business.
  • Company directors/employees selling a material stake in a trading company.
    • Material stake means that the shareholder is able to exercise at least 5% of the voting rightsin the company.

The relief can be claimed up to a lifetime limit:

  • For disposals between 6 April 2008 and 5 April 2010, the limit was £1m
  • For disposals between 6 April 2010 and 22 June 2010, the limit was £2m
  • For disposals from 22 June 2010 to 5 April 2011, the limit was £5m, and
  • For disposals from 6 April 2011 onwards, the limit is £10m

Notice that the limit has changed. You cannot retroactively claim against the changing limit:

Example 1.

John sells his business in March 2010 for £1.5m. He can claim entrepreneurs relief on the first £1m, but has to pay the standard rate of capital gains tax on the remaining £500,000.

£1m x 10% = £100,000

£0.5m x 18% £90,000

His total Capital Gains liability, therefore is £190,000.

Although the limit has been increased to £2m in April 2010, John is not allowed to reclaim the £40,000 difference in the capital gains if he had made the disposal a month later (Entrepreneurs relief would be available on the other £500,000).

Conditions to meet

To be able to qualify for entrepreneurs’ relief, disposals of assets from the following categories must meet several qualifying criteria. All assets must meet the qualifying criteria for a minimum of 1 year prior to disposal.

Categories

  • Assets used in the business.
  • Assets used in the business which were disposed of within 3 years of cessation of the business.
  • Shares or securities of your personal company disposed of a) whilst the company or group is trading, or b) within 3 years of the date it ceased to be trading.
  • Personal assets used in a business, associated with a disposal of your interest in the partnership or company.

Qualifying conditions

  • The disposal of the asset must be in conjunction with the disposal of the whole or distinct part of your business, or your share of a partnership. Relief is not available on disposal of assets of a continuing business.
  • For a disposal of shares or securities, a company is considered “your personal company” if you hold at least 5%.
  • For associated disposals, if the asset was only used in the business for part of the time you owned it, or you received any form of rent from the business for the use of the asset, the whole amount of relief may not be available (i.e. it will be pro-rated). The exact proportion will depend on the circumstances.

Spouses & Civil Partners

Husbands and wives, or civil partners, are considered separately for Entrepreneur’s Relief – both are eligible for the maximum lifetime limit.

Where assets or businesses are held jointly, both are treated as holding the appropriate proportion of the total holding.

Example 2

Amy and Adam are married, and hold a cumulative 9% holding in a trading company. Here are two different scenarios, depending on the exact holding.

a) The total holding is held jointly by both Amy and Adam.

b) Amy holds 6% in her name, and Adam holds 3%.

Although the total holding is the same, in case a) the shares are considered as 4.5% held by both Amy and Adam. This is below the 5% threshold to qualify for Relief. In case b) however, Amy’s holding would qualify for relief, since it is above the threshold.