Entrepreneurs' Relief may be claimed by individuals or trustees (of interest in possession trusts only) who sell shares or securities in a trading company or dispose of the whole or part of a trading business, providing the necessary conditions are met.
Relief is available on up to £10 million of qualifying lifetime gains arising from 6 April 2008 so any gains realised before 6 April 2008 do not restrict the availability of the lifetime limit. The relief can reduce the rate of CGT charged from 28% to 10% and can give each individual up to £1.8 million in CGT savings.
The relief is not mandatory so must be claimed either by the individual or, in the case of trustees of settlements, jointly by the trustees and the qualifying beneficiary. The claim must be made to HM Revenue & Customs on or before the first anniversary of 31 January following the tax year in which the qualifying disposal is made. For example, where a qualifying gain is made in 2013/14, the claim must be made by 31 January 2016.
Qualifying conditions - Individuals
The qualifying conditions vary depending on whether the individual is selling shares or securities in a trading company or disposing of an interest in a business.
Disposal of shares or securities
In order to claim Entrepreneurs' Relief on the sale of shares or securities, the following conditions must be met:
- The individual must hold at least 5% of the company's ordinary share capital and be able to exercise 5% of the voting rights in the company;
- The shares must be held in a trading company, or the holding company of a trading group;
- The individual must be either an officer or employee of the company or of a company within the same group; and
- All of the above conditions must be met throughout the 12 month qualifying period up to the date of disposal of the shares or securities.
The relief is also available where the company has ceased to trade provided that the qualifying conditions have been met throughout the 12 month period immediately prior to the date of cessation and the shares are either sold, or capital distributions are made by the liquidator, within three years of the company ceasing to trade.
Disposal of whole or part of a business
Where an individual is in business as a sole trader or in a partnership, the disposal of such a business interest may qualify for Entrepreneurs' Relief if the following conditions are met:
- The business must be a trade or profession. This includes commercial furnished holiday lettings in the UK or European Economic Area; and
- The individual must have owned the business, or held an interest in the business, throughout the 12 month qualifying period up to the date of disposal.
In an event where the business ceases to trade but is not sold, relief may be claimed against capital gains arising on assets used in the business, providing these are sold within three years of the business ceasing to trade.
Associated disposals
Entrepreneurs' relief may also be extended to include gains realised on assets owned personally by an individual but used in a business carried on by either:
- A partnership of which he was a member; or
- A trading company in which he was an officer or employee
The disposal will only qualify for the relief if:
- It is associated with a disposal of either the individual's interest in the partnership or of shares/securities in the company; and
- The associated asset has been used for business purposes throughout the period of 12 months up to the date of the individual's withdrawal, or if earlier, the cessation of the business.
However, the gain eligible for relief may be restricted if the individual received rent for allowing the business to use the asset or if only part of the asset was used in the business.
Qualifying conditions – Trustees
Entrepreneur's relief may be available to trustees who dispose of trust property that consists of either:
- Shares in, or securities of, a trading company of which the qualifying beneficiary was an officer or employee and owned at least 5% of the ordinary share capital and voting rights throughout the previous 12 months; or
- Assets used in a qualifying beneficiary's business for at least 12 months ending within the three years up to the date of the trustee's disposal of the asset and the beneficiary must have ceased to carry on the business on the date of disposal or three years prior to the date of disposal.
In order to qualify for the relief, the beneficiary must hold an interest in possession over trust assets which include the property being sold.
Enterprise Management Incentives (EMIs)
The 2013 Finance Act extended Entrepreneurs' Relief to EMI schemes from 6 April 2013 by relaxing the qualification conditions in respect of EMI shares. The changes are as follows:
- The requirement for the shareholder to hold at least 5% of the ordinary shares and voting rights has been removed; and
- The 12 month ownership period for EMI shares commences from the date of the grant of the option and not from the date that the share options are exercised.
These changes allow holders of EMI shares to benefit from the same CGT rate as their fellow shareholders who hold 5% or more.
Summary
Although Entrepreneurs' Relief is restricted to a lifetime limit of £10 million, it can be worth up to £1.8 million in tax savings for each individual. Professional advice should be taken when considering structuring a new business or selling shares or an interest in an existing business to ensure relief is maximised.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.