If you are based in the United Kingdom, you may have heard of the tax code known as Entrepreneurs’ Relief. However, if you are unfamiliar with the UK’s tax system, you might be confused about what it is, whether you qualify for it, and how to claim it on your taxes.
If you are interested in learning more about this helpful tax benefit and if you can take advantage of it, read on!
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What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief is a special tax relief in the United Kingdom that applies to the sale of certain businesses. This tax relief allows for a lower Capital Gains Tax (CGT) than normal.
Normally, a CGT of 20% is applied to the sale of shares and assets. However, the Entrepreneurs’ Relief drops this percentage to 10%.
This 10% CGT can be applied to up to £1 million in profit. After £1 million, the regular CGT of 20% is applied.
What is the Difference Between Entrepreneurs’ Relief and Business Asset Disposal Relief?
If you are based in the UK, you may have also heard of Business Asset Disposal Relief (BADR). Though they have different names, BADR is actually the same as Entrepreneurs’ Relief.
This tax code changed names in April 2020. However, today it is still common to hear it referred to as both.
Do I Qualify for Entrepreneurs’ Relief?
To get BADR, you typically must fulfil the following requirements:
- Employee, Sole Trader, or Partner for Two Years
You must be an employee of the company, its sole trader, or a partner. Additionally, you must have so for a period of at least 24 months before the sale.
- 5% Ownership for Two Years
You must also own at least 5% of the company. This does not just mean 5% of shares, but 5% of total value. Additionally, you must have at least 5% of voting rights within the company. These ownership requirements also must have been met for a period of at least 24 months before the sale.
Does My Business Qualify?
The requirements of the seller are not the only conditions of BADR. Additionally, the business and sale of the business must also meet the following requirements:
- Operating Business Within Three Years Before Selling
This tax code applies to businesses that are still in operation. Additionally, you can claim this tax relief on assets of businesses that are no longer operating. However, the business must have folded less than three years before the sale. If the business closed more than three years prior, you cannot claim Entrepreneurs’ Relief on its assets.
- No “Going Concerns”
“Going concerns” is another term for selling only the parts of a business that are making losses. For Entrepreneurs’ Relief, the parts of a business sold usually must still be commercially useful and able to keep running. If you sold “going concerns,” Entrepreneurs’ Relief typically will not apply.
- Property is Owned by Business
BADR can also be claimed on the sale of property. However, this property must be only a business asset owned by the company. Examples of this include warehouses or stores.
If you pay rent on the property, or if you are a landlord personally owning the property, its sale usually does not qualify for Entrepreneurs’ Relief.
How Can I Claim it?
If you think your sale qualifies for Entrepreneurs’ Relief, claiming it can be a beneficial way to save money on CGT. However, since this relief does not apply automatically, it must be actively claimed on your taxes. This claim must be made on or before January 31st following the tax year that the sale was made.
For example, let’s say your sale occurred in the tax year 2022-2023. In this case, the claim for BADR must be made on or before the deadline of January 31st, 2024.
Claiming these tax reliefs, especially with large sums of money involved, can be confusing and complicated. Additionally, small mistakes and miscalculations can end up greatly costing you.
Moreover, tax laws are frequently changing. For example, before March 2020, the limit was not £1 million, but £10 million. Additionally, prior to April of 2019, the two-year qualifications were not in place.
Because of the complexity, the best way to claim BADR is to contact your accountant and ask if your sale qualifies.
How Many Times Can I Claim Entrepreneurs’ Relief?
There is no numerical limit on claiming Entrepreneurs’ Relief – you can claim it once, twice, or ten times. However, there is a monetary limit: after the £1 million threshold, sales are taxed at the normal CGT rate of 20%.
Are There Any Risks?
There are no risks of claiming BADR, especially when you do so with the help of your accountant. However, when selling all or part of a business, there are a few things to watch out for. Being careful of the following items will make sure that you can claim Entrepreneurs’ Relief on your taxes the next year:
- Selling Shares to a Large Company
As listed above, to qualify for BADR, an individual must own at least 5% of the total value of a business. Additionally, they must have at least 5% of voting rights within the company.
When selling to a large company, however, the bigger company might offer to buy in shares instead of in cash. In these situations, you could end up with less than 5% of the total value and voting rights of the company when you cash in the shares. Therefore, you would no longer qualify for Entrepreneurs’ Relief.
- Holding a Small Share
Related to the above point, you should exercise caution if your total share and voting rights of the company are very close to 5%. As the sale approaches, you should keep close track of other share allocations, as this could dilute your percentage.
Other employees activating their share options can also bring you below the 5% threshold. Again, if your portion is very close to 5%, careful and regular monitoring of the company’s share allocations can benefit you.
The Bottom Line on Entrepreneurs’ Relief
Entrepreneurs’ Relief can be a great way for UK-based businesses to save money. Since it cuts the Capital Gains Tax in half, it is an attractive option for many entrepreneurs.
If you are an employee, sole trader, or partner selling all or part of a company, BADR might be for you.
Entrepreneurs’ Relief may apply to you if you have been at the company and held at least 5% of total value and voting rights for two years. You also can still claim Entrepreneurs’ Relief on closed businesses. These businesses can qualify for tax relief as long as they had been in operation in the three years before the sale.
BADR does typically only apply to sales that are not considered “going concerns,” and on properties that are owned by the company. It also only applies to the first £1 million in profit – after that, the normal CGT applies.
If you think you might qualify for this beneficial tax relief, contacting your accountant is an easy way to find out. The tax system can be complicated and mistakes can be costly. Additionally, tax laws frequently change. However, your accountant will be up-to-date on this complicated topic and able to help you.
As such, it is best to contact a tax expert to find out if you qualify for Entrepreneurs’ Relief. If you do, however, taking advantage is a profitable way to save money on your sales.