What is Entrepreneurs' Relief and when you should claim it
Entrepreneurs’ Relief allows you to pay less Capital Gains Tax (CGT) when you sell all or part of your business, close it down, or sell qualifying assets and securities. It was renamed Business Asset Disposal Relief in 2020, but the term is still commonly used.
What is Entrepreneurs’ Relief?
If you’re a sole trader or business partner, you can qualify for a Capital Gains tax rate of 10% payable on qualifying assets by using Business Asset Disposal Relief (formerly Entrepreneurs’ Relief until 2020).
There’s no limit how many times you can claim under the scheme, but a total lifetime limit of £1 million applies. And if you sell or close your business, there’s a deadline of two years to claim from the end of that tax period. For example, if you closed up during the 2022 to 2023 tax year, the deadline is January 31st, 2025.
The tax reduction is available to individuals operating a business including sole traders, partnerships, personal companies, joint ventures, and trusts. It’s not applicable to companies themselves.
Qualifying and eligibility for Entrepreneurs’ Relief (Business Asset Disposal Relief)
The rules to claim Business Asset Disposal Relief will vary depending on whether you’re selling assets, shares or securities, or your business.
To qualify for relief when you’re selling all or part of your business, or closing it down, you’ll need to be a sole trader or business partner, and have owned the business for at least two years at the time of the transaction. When you’re closing your company, you’ll also need to have disposed of your business assets within three years to qualify.
Ownership means you need to own at least 5% of the ordinary share capital, entitling you to at least 5% of the votes, distributable profits, and net assets on winding up.
If the business' assets exceed £25,000, you will need to use an insolvency practitioner to carry out a Member’s Voluntary Liquidation (MVL). Otherwise, the proceeds of sale will be treated as distribution, rather than a capital gain, which means the relief won’t apply.
Businesses are eligible if it is a trade or profession conducted on a commercial basis to make a profit, rather than an investment business.
If you’re selling shares or securities, other rules apply, and you can see the latest advice from the UK government, here. You may also qualify if you’re selling assets as a trustee. If you own shares but have no connection with the company (you, or someone connected with you is not an employee), then you may qualify for Investor’s Relief.
Property will only count if it’s exclusively a business asset and used rent-free. A rental property is classed as an investment, rather than an asset.
When making a part disposal of an asset from your business, then it will need to make a significant change in the nature of the business before and after the sale. For example, selling a shop but continuing to trade online would not qualify. Obviously, if you’re closing or selling your business, then any material asset is likely to be classed as part of the changes.
If you own your business with a spouse or partner, you will both be able to claim Business Asset Disposable Relief, as long as you each individually qualify.
How to claim Business Asset Disposal Relief
You can claim Business Asset Disposable Relief either through your Self Assessment tax return, or by filling in Section A of the Business Asset Disposal Relief help sheet.
The current deadlines are:
- 2022-2023 tax year: January 31st 2025
- 2021-2022 tax year: January 31st 2024
- 2020-2021 tax year: January 31st 2023
The lifetime allowance of £1 million came into effect for all qualifying disposables made on, or after, March 11th, 2020. After your gains exceed that amount, whether from one sale or multiple disposables, you’ll need to pay the standard rate of Capital Gains Tax.
Getting more support with Business Asset Disposal Relief
With any important tax decision, it’s important to get specialist advice to ensure you’re claiming correctly and making the most of available benefits. IPSE members can access tax and legal helplines, along with investigation cover if it’s ever needed. As well as with exclusive discounts and offers on services from a variety of partners supporting the self-employed.
If you’re considering selling part of your business, or the entire operation, then planning and preparing the steps in advance will give you time to have everything organised. We’ve covered securing your self-employed future in a series of Advice articles to help you achieve your ambitions with less stress.
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