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What is Entrepreneurs' Relief?

Put simply, it is a relief from the amount of capital gains tax which would otherwise be payable when you sell either shares or the whole or part of a business.

Why is the relief important?

Three reasons:
Firstly, the rate of capital gains tax was increased in June last year so that higher rate taxpayers now pay capital gains tax at a rate of 28% to the extent that their income and gains exceed the basic rate band upper limit. The rate is 18% for gains below that limit.
Secondly, the maximum amount of lifetime gains which qualify for the relief was earlier this year increased substantially from £2 million to £5 million.
Thirdly, taper relief and indexation allowance, which used to be available to relieve the amount of capital gains tax payable, have both been abolished.

Who is entitled to the relief?

Individuals and trustees, but not companies or personal representatives. Because companies cannot claim the relief, this is another factor to be borne in mind when considering whether a disposal should take the form of a disposal by individuals of their shares or a disposal by the company of its assets. Relief may be available for the former, but will not be available for the latter.

Are there any conditions which need to be satisfied to obtain the relief?

Yes, and these depend on the type of disposal. If shares are sold, there are three conditions which must be satisfied throughout the period of one year prior to the date of sale:

• the company must be a trading company (or the holding company of a trading group);
• the individual must hold at least 5% of the ordinary share capital giving at least 5% of the votes; and
• the individual must be an officer or employee (full or part time) of the company, or if the company is a member of a trading group, of one or more companies in the group.

The first of the above conditions means that the relief will not, for example, apply to property investment companies but it still does, for the moment, apply to furnished holiday letting businesses.
When the disposal is of the whole or part of a business, as opposed to shares, the 5% requirement does not apply but the business must still have been wholly (or partly) owned by the individual for the same one year period. The disposal must be of the whole or part of the business as a going concern and the business must have been conducted on a commercial basis with a view to profit.

What happens if you exchange your shares for loan notes from the purchaser, instead of taking cash?

Put simply, you will now have to decide whether you actually want to defer the gain and pay tax at the prevailing rate when your loan notes are redeemed or whether you want to treat the exchange of your shares for the loan notes as a disposal and claim entrepreneurs' relief, but pay the tax earlier. This is now a complex area and professional advice should be sought.

How much is the relief?

If the relief is available, the relevant gains are taxed at 10% instead of 18% or 28%, as the case may be. This means that if no relief has already been claimed on an earlier disposal of shares or a business, a tax saving of up to £900,000 is available (£5 million of gains x 18%, being the difference between the higher rate of 28% and the relieved rate of 10%).

How is the relief claimed?

It must be claimed on or before the first anniversary of 31 January after the tax year of disposal. So, for example, if you sold shares on 1 December 2010, that disposal will take place in the 2010/2011 tax year. The 31 January which falls after that tax year is 31 January 2012 and so relief must be claimed on or before 31 January 2013.

Andrew Drake
Family Business Practice
email [email protected]
tel 020 7591 3352

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