The Entrepreneurial Relief (ER) becomes vital when business owners or entrepreneurs sell or dispose their business. Through the entrepreneur relief, business owners can reduce their tax liability.
In simple terms, the entrepreneurial relief reduces the amount of Capital Gains Tax (CGT) payable on disposal or selling of the qualifying assets:
- trading businesses
- shares in a personal company
- shares from an Enterprise Management Incentive (EMI)
In essence, the entrepreneurial relief allows you to apply a reduced rate of 10% on the profits or gains you make when you sell any of the above assets.
Frequently Asked Questions
Am I eligible for entrepreneurial relief?
Firstly, the entrepreneurial relief is available to individuals and not to companies. There are also rules relating to the ‘qualifying period’ which is currently 2 years.
The following conditions must be met throughout the 2 years to be eligible for the entrepreneurial relief;
- You have been a sole trader, officer or employee of the company
- You have held 5% or more of the share capital of the company and 5% of voting share capital
- You haven’t exceeded your £1 million lifetime limit
What is the limit for the entrepreneurial relief?
The current limit is £1m and this can not be exceeded by individuals during their lifetime.
What if I am not selling my business but closing it down?
If your business ceases trading over two years before the disposal date but within three years of the disposal date, and provided that the business satisfied the trading conditions for an entire year preceding the date of cessation of trade, you will still be eligible for entrepreneurs’ relief.
Is entrepreneurial relief more tax efficient than drawing income from my business?
It depends. The entrepreneurial relief is relevant for capital distribution rather than taking income in the shape of small director salary and dividend. However it may be more tax-efficient not to close down your business and continue to draw income over a number of years.
Can I close down my business and then subsequently commence a new but similar business?
Unfortunately not, there is a Targeted Anti-avoidance Rule (or TAAR) which prevents you from claiming the entrepreneurial relief if you subsequently open a new business within two years of closing down your business.
The TAAR rules are generally based on the following:
- The business was a close company at any point in the two years ending with the start of the winding up
- At any time within the period of two years beginning with the date on which the distribution is made –
- The individual carries on a trade or activity which is either the same as the business or very similar
- The individual is a partner in a partnership which continues with the original company’s trade or activity
- The individual is involved with the continuation of such a trade or activity by a person connected with the individual
- It is reasonable to assume that the main purpose, or one of the main purposes of the winding up of the company is the avoidance or reduction of a charge to income tax
I have heard about another similar relief called Investor Relief (IR), how does this work?
If you are not working in the business (this is one of the eligibility requirement for the entrepreneurial relief), you may be able to apply for the investor relief instead. The eligibility criteria for the investor relief is similar but slightly different to the entrepreneurial relief.