Tax Issues

Entrepreneurs’ Tax Relief – A Basic Guide

Wondering what an entrepreneur’s tax relief is? While establishing a new business, you might face a lot of problems. Being an entrepreneur, you always struggle to minimise your expenses and maximise your earnings. Entrepreneurs’ Tax Relief is there to reduce your capital gains tax (CGT). 

When you are selling your business or a part of it, ER allows you to apply a reduced rate of 10% CGT on the profit you make.

You might have questions about Entrepreneurs’ Tax Relief, so this article aims to answer all your concerns. 

Here, you will find about:

  • What is Entrepreneurs’ Tax Relief (ER)?
  • How much ER you can claim?
  • Can you claim ER on the property?
  • How does ER work?
  • Eligibility criteria
  • Calculation of ER
  • Assets that qualify for ER
  • How to claim ER?
  • Can couples claim ER?
  • Changes to ER
  • Risks in claiming ER
  • Deadline for claiming ER
  • Quick wrap up

 

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What is Entrepreneurs’ Tax Relief (ER)?

This relief was introduced in 2008 by the government of the Labour party and came into effect from the 2008/9 tax year. When selling a part of your business or all of it, ER allows you to apply at a reduced rate of 10% CGT. 

Entrepreneurs may find it difficult to manage their business because of several reasons, while others simply do not have time to manage it.

Entrepreneurs might gain benefits by selling a part of their business or giving it away. Being an entrepreneur, you need to be aware of ER to build up your financial gains. ER has been renamed to Business Assets Disposal Relief after 6 April 2020. 

 

What is Capital Gains Tax (CGT)?

Businesses are required to pay CGT on the profits when they sell any form of asset. Whether you are a company or an individual CGT applies to everyone. It is applied when you sell anything for more than you brought it for.

 Capital Tax Gains gives you financial gain. Any property or business asset is subject to CGT (Property does not include your home).

In business, it is a tax on profit that you make on the disposal of the assets, whether it is the disposal of shares or the disposal of business. 

 

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How much ER can you Claim?

In your lifetime you can claim £1 million of ER. Within the limits, you can claim ER as many times as you like, but your claims must be within the limits. The most attractive benefit available to business persons is Entrepreneurs’ relief. 

 

Can you Claim ER on the Property?

The property that is your residential place and you have lived there throughout your ownership of the property, CGT will not be applicable and you cannot claim entrepreneurs’ relief tax. 

However, Capital Gain Tax applies to other residential properties. 

For the commercial properties, there are several factors, if the company has received any rent on such property it will be considered as an investment, and the property won’t be eligible for ER.

If the property is classed as a business asset it might be eligible for ER. And if the sale of a part of the business or all of it is associated with the sale of property that the business uses, then you can claim ER on the sale of this property. 

 

How Does ER Work?

Entrepreneurs’ Tax Relief reduces the amount of Capital Gain Tax that you have to pay on the profits when selling any assets, it relieves some of the tax.

Businesses are required to pay CGT when they sell any form of asset, whether you are a company or an individual, Capital Gain Tax applies to everyone. If you sell anything for more than you brought, CGT will apply. 

 

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Eligibility Criteria for ER:

This relief is not available for companies, only individuals are eligible for this. The person who is selling assets needs tres and voting rights to fulfil certain requirements to become eligible for ER tax relief. 

To claim for this you must be:

 

 

  • You are a sole trader of the company
  • You are an employee of the company
  • You own 5% of sharing rights
  • You own voting rights

 

Calculation of ER?

For calculating ER, you need to follow these steps:

  • Add together all your capitals gains and losses by working out your total taxable gain
  • Subtract the capital gain tax allowance
  • Pay 10% of the remaining amount

 

Assets that Qualify for Entrepreneurs’ Tax Relief

ER applies to:

  • Business assets
  • shares and securities

. However, it does not apply to personal assets (non-business assets) and your investments. 

 

How to Claim ER?

The claim for ER must be made to HMRC.

There are two ways to claim this relief:

  1. Annual Self Assessment Tax Return
  2. Completing the Section A of the HS275 form from the HMRC

Remember that, before claiming ER you must seek the advice of an accountant to avoid any complexity which can result in the loss of tax relief.

 

Can Couples Claim ER?

Yes, you both can claim ER if you own a business with a civil partner or spouse. Each of you can claim up to £10 million of assets. You both need to fulfil the ER qualifying criteria. 

 

Changes to Entrepreneurs’ Relief

The amount for ER has been changed since 2008

  • In March 2010, this relief was up to 2 million
  • After 3 months, this relief was raised to 5 million
  • In March 2011, the budget for this relief was raised to 10 million
  • In March 2020, the budget was lowered to 1 million

 

Risks in Claiming ER

You must watch out for the risks when you sell business assets, so you may not lose entrepreneurs’ relief.

 

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Selling assets to a larger company

If you are selling your business assets or a part of a business to a larger company, beware you don’t buy the company shares instead of cash In a larger company there is a risk that the share will comprise under 5% of the total voting and capital right. And accidentally you can lose the  ER. 

 

Holding a small share in the company

When you sell a business asset to a company in which your share is close to a 5% lower limit, you must make sure that the limit does not fall when you sell up. 

 

Other employees activating share options

When you sell up assets and your share limit in the company is very close to the 5% threshold, if other employees active their share options your limit of shares can be tripped below 5%, and it will automatically make you lose the eligibility criteria for ER. 

 

Deadlines for Claiming Entrepreneurs’ Relief

  1. For the tax year 2019/20 5th April 2020, the deadline for claiming is 31st January 2022
  2. For the tax year 2020/21 5th April 2021, the deadline for claiming is 31st January 2023

 

Quick Wrap Up:

 This is a tax you pay when you sell a business or part of it. The rules and regulations for ER change with each passing year, you must keep yourself updated about it.

Entrepreneurs’ relief tax is for business persons who don’t have time to manage their business or who sell their business due to several reasons. You can apply at a reduced rate of 10% CGT on the profit that you make.

 

Contact our skilled accountants for time-saving, cost-effective, and responsive accounting services. We will provide the best solutions to all your business problems and grow your business like never before! So, contact us now! We will get back to you as soon as possible!

 

Disclaimer: This blog is intended for general information on Entrepreneurs’ Tax Relief.

George

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