Entrepreneurs’ Relief provides company owners with a preferential tax rate on qualifying disposals of business assets they have built up. The rules have been tightened following an announcement in the Budget, after evidence that the relief has been increasingly used as a ‘tax planning’ vehicle by non-entrepreneurs.
What is Entrepreneur’s Relief (ER)?
The Relief allows you to dispose of all, or part of, your business and pay a lower rate of Capital Gains Tax. For eligible disposals, you will pay an effective 10% CGT rate rather than the standard 18% or 28% rates which apply for non-business disposals, depending on whether you’re a basic, or higher-rate taxpayer.
In order for a disposal to be eligible for ER, a number of conditions must be met – you must have owned the business asset for at least 12 months before selling (or closing) it, you must be a sole trader or company shareholder, and must make the ER claim within 3 years.
A number of other restrictions apply – you can find out more in our concise guide.
What are the new rules?
The Government says it is aware that the ER rules have been increasingly used for ‘tax planning’ reasons, where the recipients of the relief had not done anything entrepreneurial.
An extract from the Budget red book makes this point clear: “The Government will also ensure that entrepreneurs’ relief on the disposal of personal assets used in a business is only available when someone is making a meaningful withdrawal from that business.”
As a result, from 18th March onwards, the ER eligibility rules have been narrowed as follows:
1) ER will no longer be allowed for the disposal of shares in a company, where the company itself does not carry out a trade (e.g. it simply invests in joint venture, or similar).
2) Individuals will no longer be able to claim relief on the disposal of personal assets used in a business carried on by a company or a partnership, unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets.
For full details of the new ER rules, refer to this document – Capital Gains Tax: Entrepreneurs’ Relief associated disposal rules.