This relief is available to individuals and some trustees to help off-set a capital gains tax liability on the sale of part or all of their business, it applies when capital gains exceed the £11,000 capital gains allowance for individuals. Entrepreneur’s relief reduces the capital gains tax rate from 18% or 28% depending on the individual’s taxable earnings to 10%.
To qualify the sale has to be on the trading part of a business or shares in a private trading company, selling a standalone asset will not count, neither will selling shares in an investment company. If the main part of a business is sold on, then the remaining assets can be sold up to three years afterwards and still qualify for entrepreneur’s relief.
When selling shares in a private trading company the shareholder has to have owned at least 5% of the company and have been an active employee throughout the year running up to the sale although this could be in a part-time capacity. Where business assets are held outside the company by the individual then these will also qualify as long as no rent is being received by the owner for their use and they are sold at the same time or up to three years after the main part of the shareholding.
Mrs F pays herself a salary of £10k and in the same year sells off her trading business for a profit of £25k as well as making £60k on shares she owns in an investment company.
The profit she made from the sale of her trading business will qualify for entrepreneurs relief at 10% however the sale of shares in her investment company will not.
If all of Mrs F’s salary is covered by her personal allowance then the unused £34k of her basic rate band will be allocated to her capital gains at a rate of 18%. The basic rate band has to be used against gains qualifying for entrepreneurs relief first, this means that the £25k qualifying sale will be taxed at 10% instead of 18%, after that she will have £9k of her basic rate band left over for the sale of the investment company.
Of the £60k sales profit of the investment company she can choose to use her £11k capital gains allowance to reduce the taxable gain to £49k, of this £9k is taxed at the basic rate of 18% and the remaining £40k will be taxed at the higher rate of 28%.
Mrs F’s capital gains bill is the total of:
£25k x 10%
£11k x 0%
£9k x 18%
£40 x 28%
This means she will need to pay £17k in total of capital gains tax.
Timing and business structure are absolutely critical to getting the most out of this relief and there are multiple ways to be caught out on technicalities, entrepreneurs relief can be claimed multiple times on different businesses and is subject to a lifetime limit of £10m per individual.