Entrepreneurs Relief (ER) can reduce the rate of Capital Gains Tax (CGT) on disposal of business assets from 18% or 28% to 10% and is subject to a lifetime limit of £10million. It is a valuable relief and care is required to ensure qualifying conditions are met.
In order to qualify, you must have met the conditions for at least 12 months prior to the sale, so forward planning is essential. ER is available broadly where there is a disposal of a business, or shares in a company. Additionally, certain other disposals of assets used in the business or by the company can qualify.
If you are disposing of shares in a company it must be a trading company and must not have substantial (over 20%) non-trading activities. The individual shareholder must have been an officer or employee and held 5% of the ordinary share capital and voting rights throughout the year before the sale. Further details are on HMRC Helpsheet HS275.
Four common pitfalls are:
Assets held by a company: ER is not available to companies and a sale of a business by a company will not qualify. It may be worth considering whether the buyer could buy shares rather than assets.
Charging rent to a company or partnership for use of personally-owned assets: If you charge rent for the use of an asset, this will restrict the availability of ER on the asset for periods after April 5, 2008.
Make the claim on time: ER must be claimed by the first anniversary of the January 31 after the tax year in which the disposal is made.
Whole or part of a business: For individuals, ER is not available on the disposal of assets of a continuing business unless they are comprised in the disposal of a distinct part of the business.
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