What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief (ER) reduces the rate that Capital Gains Tax (CGT) is paid, from 20% to 10%, when some or all of a business is sold. It is available to most individuals, qualifying beneficiaries and some trustees of settlements. However, this is subject to certain conditions including a lifetime limit of claims that are eligible for ER – currently set at £10 million.
Who is Eligible for ER?
For individuals, ER applies to gains made on disposals of shares of a trading company, the transfer of whole or part of a business, certain assets on cessation of a business and associated disposals of personal assets.
On the sale of shares or securities, the company must qualify as a “personal trading company” which meets the following conditions:
- the individual must be an employee or office holder in the company for the 2 years preceding the sale (one year for disposals prior to 6 April 2019);
- the company must be trading or the holding company of a trading company; and
- the individual must hold at least 5% of the ordinary share capital, exercise at least 5% of the voting rights and be entitled to at least 5% of either the profits on distribution and assets on winding up or disposal proceeds if the company is sold.
ER is also available to trustees when they dispose of “settlement business assets”. These are the assets held in a trust which have been used for the purposes of a business where there is a “qualifying beneficiary”- someone with an interest in possession and satisfies all of the ER qualifying conditions for a 2 year period.
The case of ‘Quentin Skinner 2005 Settlement L and others v HMRC 2019’ confirmed that the qualifying beneficiary only needs an interest in possession at the date of disposal. In other words, an interest in possession is not needed throughout the full 2 year period – although the 2 year period is relevant with respect to the other qualifying conditions. This case has facilitated the use of ER by trustees and tax planning in relation to the sale of a family business.
A business owner could transfer business assets into a trust and give family members working in the business an interest in possession in the trust. This will enable such family members to claim ER on a later sale, utilising each family members £10 million allowance provided all the other conditions are met.
However, questions have been raised over the future of ER, so it is recommended that you seek professional advice in order to gain full advantage of ER whilst it is still available