Our experts at DSR Tax Refunds know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief is a type of tax relief that people who sell their business (or a part of it) might be able to offset against any Capital Gains Tax they may be liable to pay. Basically, if you are eligible for this tax relief, you would only have to pay a rate of 10% Capital Gains Tax on gains on any qualifying assets. This is instead of the normal rate. It applies if you sell (or dispose of) some or all your business.
How do you qualify for this tax relief?
HMRC state that you qualify if you sell or dispose of the following:
All or part of your business as a sole trader or business partner. This includes the business assets after the business closed.
Shares or security in a company where you own at least 5% of the shares and voting rights – HMRC call this a ‘personal company’.
Shares you got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013. This is a certain type of employee share scheme which grants employees share option to reward staff and allow them to be taxed more efficiently.
Assets you loaned to your business or personal company.
You could also qualify for this tax relief if you are a trustee and you’re selling assets held in that trust.
Expert help can be invaluable in claiming your maximum tax relief and our tax preparation specialists are always on hand to help – call our friendly team on 0330 122 9972.
What if you’re selling all or part of your business?
HMRC state that BOTH of the following conditions must apply to qualify for Entrepreneurs’ Relief:
You’re a sole trader or business partner in a partnership – so this doesn’t apply to limited companies.
You’ve owned the business for at least one year before the date on which you sell it.
These conditions also apply if you are closing the company down rather than disposing of it. You would also need to dispose of all of your business assets within 3 years to qualify for this tax relief.
What if you’re selling shares or securities?
HMRC state that BOTH of the following conditions must apply to qualify for Entrepreneurs’ Relief – and they must have applied for at least one year before you sell your shares:
You’re an employee or office holder (someone appointed to a position in a company but doesn’t have a contract or receive regular payment, for example, a registered company director) of the company – or a company in the same group.
The company’s main activities are in trading (so non-trading activities such as investment wouldn’t qualify) or the company is the holding company of a trading group.
That’s not all though! HMRC also state that EITHER one of the following must also apply for at least one year before the sale of your shares or securities. Either:
You have at least 5% of shares and voting rights in the company (as long as they’re not EMI shares); or,
You were given the option of buying them at least one year before you’re selling them – if they are EMI shares.
If the company stops trading for any reason, you could still qualify for relief if you sell your shares within 3 years of the company stopping trading.
What if you’re selling assets you have loaned to the business?
HMRC state that BOTH of the following conditions must apply for you to qualify for Entrepreneurs’ Relief:
You have sold at least 5% of your part of a business partnership or your shares in a personal company.
You owned the assets but loaned them to your business partnership or personal company for at least one year before you sold your business or shares, or the business closed.
How do you work out how much Capital Gains Tax you owe if all your gains qualify for this tax relief?
Firstly, you have to work out whether some or all of your gains are eligible for Entrepreneurs’ Relief – only those gains that do qualify are eligible for the lower Capital Gains Tax rate.
If all your gains qualify for Entrepreneurs’ Relief, it’s quite simple. All you need to do is:
Work out your total gain (profit) for all qualifying assets.
Add together those gains (minus any qualifying losses) to work out your total taxable gains.
Deduct your Annual Exempt Allowance (also known as your tax-free allowance but not to be confused with the personal allowance you are entitled to on your earnings).
You are liable to pay 10% Capital Gains Tax (with the Entrepreneurs’ Relief applied) on what is left.
How do you work out how much Capital Gains you owe if you have other gains as well?
This is where it gets trickier. How much you owe depends on what rate of Income Tax you pay and when you made your gain.
If you are a higher rate income tax payer, you will pay 28% on any gains made before 6th April 2016 that don’t qualify for Entrepreneurs’ Relief. For gains made after that date that don’t qualify for Entrepreneurs’ Relief, you will pay 28% on gains from residential property and 20% on all other gains. You can use your tax-free allowance against the gains that would be taxed at the highest rate though.
If you are a basic rate taxpayer, you need to work out the tax rate you will pay on gains not eligible for Entrepreneurs’ Relief. To do this, you need to do the following:
Work out your taxable income – so that is from all your income sources (wages, rental income and so on). Then take away your personal allowance (this refers to your personal income tax-free allowance) and any other income tax reliefs you are entitled to.
Take this amount away from the basic rate tax band for the year you made the gains (£33,500 for tax year 2017/8) and this should give you the amount of basic tax rate band you can use against your taxable gains.
Work out your total taxable gain (profit).
Use your basic tax rate band first against any gains that are eligible for Entrepreneurs’ Relief – you will pay 10% on these.
Use any remaining basic tax rate band against your other gains. You will pay 18% on any gains made before 6th April 2016 and 18% for residential property gains and 10% on gains from other chargeable assets for gains made after 6th April 2016.
If you still have gains liable for Capital Gains Tax, you will pay 28% on any gains made before 6th April 2016 and 28% on gains from residential property and 20% on all other gains made after that date. Like higher-rate taxpayers, you can use your tax-free allowance against the gains that would be taxed at the highest rate though.
Of course, we know how complicated this sounds if you are unfamiliar with HMRC’s rules and regulations and that’s why sometimes it pays to get the experts on your side. Our team of tax preparation specialists can make sure that you claim your full amount of tax relief without falling foul of HMRC regulations – call our friendly team on 0330 122 9972.
How do you claim Entrepreneurs’ Relief?
You can claim this tax relief either through your self-assessment tax return or by filling in the Entrepreneurs’ Relief help sheet and returning it to HMRC. If you are a client of DSR Tax Refunds, we sort all of this out for you so you don’t need to worry about dealing with HMRC because we do that for you.
How can DSR Tax Refunds help?
We know that claiming your maximum Entrepreneurs’ Relief can be a complicated affair, even with our helpful guide to tell you everything you might need to know. it’s all very well reading about it and knowing what HMRC’s stand on it is – but how do you apply that to your own circumstances? It can seem like an absolute minefield but help is always available and you don’t need to battle through this alone. Our team of experts at DSR Tax Refunds are always on hand to help our client and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
This page was last updated on 24/10/2018.