“I often get asked about entrepreneur’s relief”. When does it apply? How can I benefit from it?
David Dees, corporate partner at Heald Solicitors, says “I often get asked about entrepreneur’s relief”. When does it apply? How can I benefit from it?
Entrepreneur’s relief (ER) is a relief that applies to capital gains tax when certain business assets are sold. If it applies you will only pay capital gains tax at 10% when you sell your business assets. The aim of the relief is to encourage business owners to set up and expand their own businesses. Investment, innovation and employment are all encouraged, so the justification goes.
It is very important that you get advice about exactly how the rules may apply to your business – in summary:
1 If you sell a business asset, usually shares in a company;
2 the company is a trading company or a holding company of a trading group;
3 you own at least 5% of the ordinary voting share capital;
4 you are either an officer or employee of the company; and
5 since 6 April 2019 these conditions have applied for at least 2 years: then you should be eligible for the relief.
The relief is available for part disposals as long as the test is satisfied and is only available to individuals rather than companies.
It is important to be careful because the relief can be lost for example:
A if you have ceased to be a director or employee;
B if you allow your holding to drop below 5% for example because of new investors coming into the company; or
C you allow non-trading activities to become “substantial”. HMRC’s general view is that “substantial” means 20% or more and if that occurs you could lose the relief.
ER is a great relief and has benefited many business people – get it while you can, it may not last forever.