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Why you ought to know about entrepreneurs’ relief
February 2nd 2011
Virtually every day in the news reference is made to the austere times we are living in. It could therefore come as a surprise to learn that the UK currently has a very favourable tax regime for most shareholders selling shares in small or medium sized companies. In this month’s blog we discuss entrepreneurs’ relief and why company shareholders ought to know about it.
Entrepreneurs’ relief was introduced for the sale of qualifying business assets on or after 6th April 2008. When it was first introduced the relief was available on the first £1 million of qualifying capital gains. The amount was then doubled to £2 million from 6th April 2010 and recently to £5 million, making it potentially very beneficial. (The limit has increased again since this blog was written to £10 million from 6 April 2011).
Entrepreneurs’ relief works by reducing the amount of a capital gain which is subject to tax, where the gain has arisen on the disposal of qualifying business assets, such as shares. As with all tax reliefs, there are qualifying conditions which have to be met in order to claim it, which I won’t go into here, but as a general rule it is available to an employee or officer who has at least a 5% shareholding in a small or medium sized trading company.
Each qualifying shareholder pays tax at an effective rate of only 10% on the first £5 million of qualifying capital gains they make (this is a lifetime limit). Spouses who are directors, officers or employees may also qualify for the relief giving potentially £10 million at 10% per couple.
Obviously none of us know what may happen to this relief in the future but personally I believe that it is unlikely to disappear ahead of the next general election. Assuming that entrepreneurs’ relief does remain unchanged during this time, there should be a stable low tax climate for company disposals over the next few years.
One pitfall you need to avoid is selling the business rather than the shares as this almost certainly will lead to a much higher effective tax rate, with rates over 50% in certain circumstances, rather than the 10% you may be expecting.
The decision to sell a company and the timing of a sale should always be carefully thought out with reference to a large range of factors – such a decision is never straight forward. Having said this, the availability and extent of entrepreneurs’ relief ought to be sufficient to justify its inclusion as a matter for serious consideration by any shareholder who is coming up to retirement age in the next few years, or who is contemplating a disposal of their company.
The information above is intended as a guide only. Specific advice should always be sought on the application of the relevant legislation in any particular situation.
