Following the 2008 Budget, when a new flat 18% capital gains tax rate was unveiled, the Government created a new scheme to compensate business owners who would previously have paid 10% tax on the sale of their businesses (with maximum taper relief applied). This was one of a number of measures the Government at the time announced to promote entrepreneurialism via the tax system.
A brief history
Entrepreneurs’ relief initially allowed business owners to pay the same 10% rate on the first £1 million of business sale proceeds. At Alistair Darling’s final Budget, the chancellor doubled the lifetime allowance to £2m. The limit was further extended to £5m during the ‘Emergency Budget’, effective from 23rd June 2010.
The lifetime limit was extended to £10m during the 2011 Budget, effective from 6th April 2011. This limit remained for 9 years but was reduced to a mere £1m from 11th March 2020 onwards.
Entrepreneurs Relief – Key Points
- The relief can be claimed on the disposal of all or part of a business, shares in the company, or business assets after the entity has ceased trading.
- The relief can only be claimed by an individual; if you are a sole trader or in a partnership, of hold shares in your own limited company.
- Limited companies, who may own shares in other companies, may not claim entrepreneurs’ relief, although some trustees can.
- You must have owned the business for a year prior to the business disposal, or for a year prior to the date on which the business ceased trading.
How and when to claim
- There are two ways to claim the relief; either via your Self Assessment Tax Return, or by completing Section A of the Entrepreneurs’ Relief fact sheet (see link below).
- Individuals can make as many claims against their allowance over time, although gains in excess of the £10m lifetime allowance will be taxed at the standard 18% CGT rate (28% for higher rate taxpayers).
- A claim must be made to HMRC within 12 months of 31st January in the year following the one in which the disposal was made, i.e. if you made an eligible disposal during the tax year ended 5th April 2018, you will have until 31st January 2020 to make a claim. This is roughly 22 months following the end of the tax year in question.
- Our guide just provides a basic outline of the way the relief works.
- For more information, read the HMRC’s PDF entrepreneurs’ relief helpsheet here.
- Clearly, to ensure that you are eligible to claim relief on the disposal of your company/business, you should seek professional advice first.