Entrepreneurs' Relief: are you sure you qualify?

Entrepreneurs' Relief ("ER") is so well known it is often taken for granted by those disposing of their business. This valuable relief reduces the rate of tax to 10% on gains of up to a lifetime limit of £10 million and is designed to benefit those who create and develop economic growth. However all too often issues jeopardising the availability of ER are only identified when advising on an imminent disposal. This is frequently too late to remedy the problem and can be a costly mistake.

Even where a sale may not be contemplated, it is good housekeeping to review your ER position to ensure it remains available. Many of the conditions relevant to ER have to be satisfied for a 12-month period leading up to (and ending with) the disposal. Who knows where the next 12 months may take you and your business, but ensuring you qualify for ER is simple.

In our ER health check series we will:

  • Explain how ER works.
  • Look at some planning ideas.
  • Examine the pitfalls.

So let's start at the beginning, one-year before.

ER can be available on:

  • A disposal of the whole or part of a business – this can be a sole trader or partnership.
  • A disposal of assets used in the business at the time that the business ceases.
  • A disposal of shares or securities in a company.

Share Sale - are you sure you have a material disposal of a business asset?

For the disposal of shares to be a material disposal of a business the company must be the individual's personal trading company and the individual must be an officer or employee. These conditions must be met for the full year prior to and ending with the date of disposal.

For a company to be a 'personal company' the individual must own at least 5% of the ordinary share capital and, as a result of that shareholding, have at least 5% of the voting rights, i.e. the voting rights cannot be attributable to, or as a result of, other shareholdings in the company.

An individual must be an employee, meaning they are employed under a contract of service or they must be an officer. An office is a position which exists independently of the person who holds it e.g. a director or company secretary.

The company must be a trading company or a member of a trading group. To be considered as trading, the activities of the company or the group must not, to a substantial extent, include activities other than trading activities. In other words, the company trades rather than invests.

Therefore you must ensure the following conditions are all satisfied for the entire one year period leading up to and including disposal:

An individual must be an employee, meaning they are employed under a contract of service or they must be an officer.

1. You hold at least 5% of the ordinary share capital.

  • Do you hold the correct type of shares?
  • Do family members hold shares?

2. That shareholding must entitle you to at least 5% of the voting rights.

  • Is this the case?
  • Have there been any amendments or variations to the voting rights of your shares?

3. You are an officer or employee of the company.

  • Are those family members who hold shares employed in the business?

4. The company or group must be trading.

  • Have you reviewed the activities of the company or group to ensure the conditions for trading are met?

Remembering that these are the obvious conditions, if your company's structure is more complicated as a result of family shareholdings, Enterprise Management Incentive (EMI) shares, or trading premises held by a shareholder or third party, then careful and early consideration is necessary to ensure relief is available.

So, are you still sure you will qualify for Entrepreneurs' Relief?

We can help you answer that question.

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.