Small and medium-sized businesses are regarded as the backbone of the UK economy, accounting for more than 99 percent of all businesses in 2019. As the coronavirus pandemic spread, Chancellor Rishi Sunak’s maiden Budget sought to reassure them, offering “interruption loans” and promises to fund statutory sick pay. We have crafted this article to address all issues relating to the Entrepreneur Tax Relief changes in the UK.
What is Entrepreneur Relief?
This is a Capital Gains Tax reduction that can be used when selling a business or a farming-eligible asset in certain situations. The CGT rate is reduced to 10% if the prerequisites are reached.
Currently, the exemption only applies to gains of up to €1 million. As a result, the maximum tax reduction is €230,000 per person. The €1 million cap is a once-in-a-lifetime amount.
How does entrepreneur tax relief UK work?
The entrepreneur tax relief changes in the UK mean you’ll only have to pay CGT at the basic rate of 10% on the first £1 million in gains you make.
For higher or additional-rate taxpayers, who pay 20% on most assets, this practically implies you’ll pay half the regular rate.
The allowance is on an individual basis, therefore, the maximum amount you may claim is £1 million per person, not per business you sell.
Any gains over £1 million are at their maximum rate, which is 20% if you have taxable income or capital gains of more than £50,270 in 2021–22 (£50,000 in 2020–21) in most parts of the UK, and £43,662 in Scotland (£43,430 in 2020–21).
Entrepreneur tax relief reform UK
The Entrepreneur Tax Relief UK program, which encourages people to create their own businesses, has been revised but not eliminated. It previously granted business owners who had been in business for two years or more a lower rate of capital gains tax, from 20% to 10%, when they sold their company, up to a lifetime ceiling of £10 million in gains. That amount has now been reduced to £1 million, with immediate effect. Only 20% of businesses would be affected, according to the chancellor, and the £6 billion saved over the next five years will be spent slashing other business taxes.
“The government’s goal is clear: they want to invest in growth and help firms,” says Helen Clarke, a tax partner at Irwin Mitchell. “However, a 90% reduction in the lifetime limit is a significant loss for entrepreneurs, whose capital gains tax rate will double from 10% to 20%. Many serial entrepreneurs would have already spent their £1 million quotas and will be the hardest hit by this shift.”
How do you qualify for Entrepreneur tax Relief UK?
You must have had ownership of the firm’s assets for a minimum of three years. The three years must have occurred within the five years before the disposal.
You must own at least 5% of the company’s stock.
You must have been a director or employee of the company for three out of the last five years and have spent more than half of your time there. This should ideally be in a managerial or technical position.
It should be emphasized that any past ownership of assets by a spouse is not included when defining the three-year continuous period. If the company was a sole trader before, the same rules apply.
Can I claim entrepreneurs’ relief?
To claim entrepreneurs’ relief, you have to fulfill certain conditions, as follows.
The 2 year qualifying period
If your asset sale is to qualify for entrepreneurs’ relief, you must meet two standards in particular for a minimum of 24 months:
#1. Are you an employee or sole trader?
You must be either an employee of the company (this includes being a company director) or a sole trader.
#2. Do you own at least 5 per cent?
To qualify for entrepreneurs’ relief when selling firm shares, you must own at least 5% of the company’s share capital. You must own at least 5% of the company in terms of value (not just the number of shares), and you must have at least 5% of the voting rights.
Other rules of entrepreneurs’ relief
Your sale of shares or other business assets must also meet a few other conditions.
#3. Did the business close less than 3 years ago (or is it still operating)?
If the company has ceased operations, it must have done so within the last three years prior to the sale. You can’t make a claim on assets from companies that went out of business more than three years ago.
#4. Are you selling a ‘going concern’?
If you’re merely selling a portion of a company, it must be commercially viable and able to continue (what accountants call a ‘going concern). This implies you can’t just sell off the business’s loss-making sections and claim entrepreneurs’ relief.
#5. If the assets include property, does the business use it rent-free?
Only property sales that are exclusively commercial assets (e.g., a store or warehouse) owned by the business and used rent-free qualify for entrepreneurs’ relief. If your firm pays rent on the property, or if you are a property landlord with a company structure, the property is classified as an investment rather than an asset, and you are not eligible for entrepreneur relief.
How much is entrepreneurs’ relief worth?
When selling shares or business assets, using entrepreneurs’ relief often means paying half the CGT you would otherwise. If your total income for the year (that is, your regular income plus any taxable gains, minus your personal allowance and CGT allowance) puts you in the higher-rate tax bracket, you will have to pay a higher-rate CGT at a rate of 20%. However, sales of assets that qualify for entrepreneur’s relief only incur basic-rate CGT, so you’d only have to pay 10%.
Entrepreneurs’ relief is available on assets worth up to £10 millionAnythingng over this amount is subject to a 20% tax rate. As a result, the relief could save you up to £1 million. You can never claim more than this because it is a personal, lifetime limit.
Can couples claim entrepreneurs’ relief?
You can both claim entrepreneurs’ relief if you own a firm with your spouse or civil partner, and each of you can claim up to £10 million in assets (possibly saving you £2 million in total). Keep in mind that both of you must meet all of the eligibility requirements. That is, you must both work for the company and own at least 5% of it, and you must have done so for at least two years. A spouse cannot use their spouse’s allowance just because they are married; both parties must meet the eligibility requirements.
What are the risks when claiming entrepreneurs’ relief?
There are a few pitfalls to watch out for when selling business assets. To ensure you don’t accidentally lose out on entrepreneurs’ relief.
#1. Selling to a larger company
If you’re selling your firm (or a portion of it) to a larger corporation, be wary if they offer to pay you in stock instead of cash. Your shares may make up less than 5% of the total capital and voting rights if the company is significantly larger. When it comes time to cash in the shares, you will no longer meet the qualifying criteria for entrepreneur’s relief.
#2. Holding a small share in the company
If your company’s share price is extremely close to the 5% lower limit. You’ll want to make sure it doesn’t fall below that level when you’re ready to sell. Other share allocations may dilute your holdings, so keep a close eye on your situation.
#3. Other employees activating share options
If your share is near the 5% barrier, it may be tipped below 5% if other employees exercise their stock options. Companies can avoid this situation by requiring that options be purchased only on the day of the sale. Right before the transaction is completed.
How does CGT work without entrepreneurs’ relief?
If you or your business aren’t eligible for entrepreneur’s relief. You’ll have to calculate and pay your capital gains tax just like any other asset. More information can be found in our guide on capital gains tax rates and exemptions.
You begin by calculating the profit from the sale of your company.
This means you deduct the purchase price from the sales price, as well as any investments in the business and any costs associated with buying or selling it.
After that, you subtract your personal allowance. You can earn up to £12,300 in capital gains tax-free in 2020–21 and 2021–22, and couples can pool their allowances.
Any gain above this threshold is subject to CGT, which is at a rate of 10% for basic-rate taxpayers and 20% for higher-rate taxpayers.
Remember that your capital gain will be used to determine your tax bracket for the year. So even if you’re a basic-rate taxpayer, a substantial capital gain could put you at a higher rate.
What is investors’ relief?
Investors’ relief is comparable to entrepreneurs’ relief. Except it is available to those who are not employees or directors of the company issuing the shares. Only if you have no ties to the corporation are you eligible for this relief.
There is no minimum shareholding requirement, so you can own less than 5% of the stock and still qualify. You can claim investors’ relief on top of any entrepreneurs’ relief you claim because it has its own unique £10 million lifetime maximum.
In order to qualify for investment relief, a few more requirements must be met:
- Shares must be newly issued, not transferred from another shareholder
- You must hold the shares continuously for at least three years before selling them
- You must be holding the shares for commercial reasons, not simply to avoid tax
- The shares must not be listed on a recognized stock exchange (e.g., the London Stock Exchange) at the time of issue. Listings on AIM are permitted.
Conclusion
Entrepreneur relief changes should be given careful thought by business owners. Proper preparation is the key to ensuring that it is granted. At Opes Financial Planning Ltd, we work with directors and small business owners to ensure that they are collecting as much profit as possible from their businesses while remaining tax-efficient. If you would like to schedule a consultation to discuss your choices, please contact us.
FAQs
Has Entrepreneurs Relief been abolished?
Entrepreneur relief changes, aimed at encouraging people to start up their own business, has been reformed but not scrapped.
What is the entrepreneurs relief limit?
At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of Entrepreneurs’ Relief would be reduced from £10 million to £1 million for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020
Can you claim entrepreneurs relief on property?
Entrepreneurs’ relief is not available on a property that has been let. New entrepreneurs’ relief limit may make it more beneficial to charge market-rate rent and claim capital allowances.
