Entrepreneurs Relief was introduced in the 2008 Finance Act as a sop to pacify small business owners enraged by the abolition of taper relief. Alistair Darling hadn't intended to give them any concessions at all at first to compensate for seeing potential tax liabilities on their retirement nest eggs almost doubled in some cases, but was forced to think again after all the uproar it caused. Entrepreneurs Relief is available for gains made on the disposal of the following assets:
a) all or part of a qualifying business; or
b) assets associated with a qualifying business following the cessation of that business.
There is a lifetime limit of £10 million, and all gains within that limit will be taxed at an effective rate of 10% rather than the flat rate of 18% or 28% applying to other capital gains. A taxpayer must have held assets used in a qualifying business for at least 12 months prior to disposal. If that business was a limited company, the taxpayer must have:
a) been an officer or employee of that company; and
b) owned at least 5% of the shares (and exercised at least 5% of the voting rights) in that company.
A qualifying business is any kind of trade apart from property investment. However, you are allowed to let a property you own to a trading company in which you have a qualifying interest (at least 5% of the shares plus you are a director or employee) and still claim entrepreneurs relief on the sale of the property as an associated disposal. It also includes shares in a holding company.
It should be noted that entrepreneurs relief is only available for assets that are part of a disposal (or part disposal) of the business itself. It does not apply to assets sold for other reasons where the business carries on as before under the control of the existing owners. However, this does not prevent a minority shareholder from claiming relief on the disposal of assets or shares that he or she owned in the business.
It also only applies to the individuals holding business assets, not to the business itself, so if a limited company was to sell its remaining assets and the shareholders then withdraw the proceeds from the company and dissolve it, entrepreneurs relief would only apply to the final distribution of the retained profits. The company would pay corporation tax on the chargeable gains in the normal way.
It is important to note that Entrepreneurs Relief can only be claimed on assets that were actually used by the company for trading purposes. This tends to exclude large cash holdings or investments built up in a company out of retained profits over many years. This often happens where the company is used as a tax shelter and cash is retained for long-term saving rather than for re-investment in the business. When the shareholders sell or dissolve the company and extract the accumulated profits as a capital distribution, Entrepreneurs Relief can be denied on the grounds that they are not trading assets. Anyone owning shares in a company where more than 20% of the assets are surplus to its trading needs or which obtains more than 20% of its income from non-trading assets could be in danger of losing Entrepreneurs Relief. There are a few things that can be done to minimise this risk however without having to pay tax on a huge dividend. Please give us a call if you would like any advice on this subject.
Entrepreneurs relief cannot be applied retrospectively to past disposals. This means you have to claim it on your tax return for the year of disposal. You have the usual year after the filing deadline to amend a tax return but you cannot claim entrepreneurs relief against capital gains that should have been reported on a previous year's tax return, or which were reported but where relief wasn't claimed and it is now too late to amend the return.
There are time limits for selling assets that remain in the possession of a company or its shareholders after the business itself has ceased or been transferred as a going concern to new owners. Broadly you have up to a year to sell a property that was used by a business that has ceased to trade, or 3 years if it has not been used for any other purpose since then. If you sell shares in a company that continues to trade then you must normally sell any assets used by that company at the same time in order for it to be regarded as an associated disposal.
It is important to note that corporate bonds or loan notes will not normally qualify for entrepreneurs relief when they are redeemed unless they are what are known as Qualifying Corporate Bonds (QCBs) issued up to 5th April 2008. There are transitional rules to allow holders of QCBs to claim entrepreneurs relief after this date subject to certain conditions.
Come and speak to us if you want any help or advice claiming Entrepreneurs Relief.