Entrepreneur’s relief is one of the Capital Gains Tax (CGT) reliefs currently available on the disposal of business assets. The relief allows a reduced rate of tax to be charged on qualifying gains arising on the disposal of business assets, providing the relevant conditions are met.

Who qualifies?

The relief may be claimed by the following:

– Individuals who are in business as a sole trader or as a partner in a trading business;

– Individuals who hold shares in their personal trading company where at least 5% of the ordinary shares are held which gives them at least 5% of the voting rights.

Some trustees may also claim the relief.

The relief is not available to the following:

– Companies;

– Personal representatives of deceased persons;

– Trustees of discretionary settlements.

Lifetime limits

Capital gains which qualify for Entrepreneurs’ Relief are subject to a lifetime limit as follows:

–  For disposals on or after 6 April 2008 to 5 April 2010, £1 million;

–  For disposals on or after 6 April 2010 to 22 June 2010, £2 million;

–  For disposals on or after 23 June 2010 to 5 April 2011, £5 million; and

–  For disposals on or after 6 April 2011, £10 million.

If the qualifying gains together with all previous gains on which Entrepreneurs’ Relief has been claimed should exceed the lifetime limit applying at the time of disposal, the whole of the excess gain will be taxed at the normal CGT rates.

Conditions

To claim the relief, a number of conditions must be met throughout a “qualifying period”.

A “qualifying period” would be the one year period either up to the date of disposal or the date the business ceased.

The qualifying conditions depend on the type of disposal made:

Disposal of the whole or part of a business

The business must have been owned directly as a sole trader or owned by a member of a partnership. Entrepreneurs’ relief cannot be claimed on the disposal of assets of a continuing business unless the assets are disposed of together with a distinct part of the business.

Disposal of assets following the cessation of a business

The business must have been owned directly as a sole trader or as a member of a partnership throughout the qualifying period ending on the date the business ceased. In addition, the date of cessation must be within the period of three years before the date the assets were disposed of.

Disposal of shares or securities in your personal company

The conditions are that throughout the qualifying period of one year, the company in which you dispose of the shares/ securities must be:

–          Your personal company in which you hold at least 5% of the ordinary shares which gives you at least 5% of the voting rights, and

–          It is either a trading company or a holding company of a trading group, and

–          You must be either an officer or employee of the company or a company/ companies who are is a member of a trading group.

Associated disposal

An associated disposal takes place in association with your withdrawal from a business carried on by either:

–          A partnership of which you are a member, or

–          Your personal trading company in which you are an officer or employee.

Therefore the relief will be due only where a disposal of an asset is associated with a reduction of your interest in the assets of the partnership or a disposal of shares in your personal company.

How to claim

A claim must be made as follows:

–          By the individual (spouses and civil partners may each make a claim);

–          Jointly by the trustees of settlements and the qualifying beneficiary.

The claim should made in writing by one year and ten months from the end of a tax year in which the qualifying business disposal occurs. If this occurs in the 2013/14 tax year, the claim must be made by 31 January 2016.

The claim should be made in the Tax Return. If this cannot be done, then the claim may be made separately by writing to HMRC or by submitting a form which can be obtained from HMRC’s website.

How relief is given

Relief is given by reducing the rate of capital gains tax to 10% for disposals occurring on or after 23 June 2010. (For disposals made on or before 22 June 2010, the qualifying gain would be reduced by 4/9 and the net amount charged to CGT at 18%.)

Qualifying gains and qualifying losses in a tax year are aggregated to produce a net figure. The CGT annual exemption, where is has not been utilised,may be deducted and the balance of the gains will be taxed at 10%.

Entrepreneur’s Relief may be claimed on more than one qualifying disposal as long as the lifetime limit has not been exceeded at the time of disposal. It is therefore necessary to keep a record of the gains against which a claim for relief has been made previously.

The above give an outline of Entrepreneurs’ Relief under the current regime. There are detailed rules relating to trusts which have not been covered above. Professional advice should be sought if you are considering claiming the relief.