Where available, Entrepreneurs’ Relief can reduce the capital gains tax rate to 10% (down from the usual rate of 20%) in respect of the first £1 million of an individual’s lifetime qualifying capital gains. It can therefore be a valuable tax relief, offering tax savings of up to £100,000.
When is Entrepreneurs’ Relief available?
Entrepreneurs Relief may be available on the disposal of shares (or securities) of a trading company (or the holding company of a trading group) if the seller has, for the two years leading up to the disposal:
In this context, (i) there is no minimum working time requirement for employees or officers;and (ii) non-executive directors and company secretaries, as well as executive directors, count as officers.
An individual’s Entrepreneurs’ Relief position may need to be considered carefully (particularly given that the conditions detailed above need to be satisfied for the entire two year period prior to the disposal).
The following can affect the availability of the relief:
Interaction with EMI Options
If the shares being sold were acquired after 5 April 2013 under an EMI option, then the 5% tests are waived. In such cases, the EMI option must have been granted at least two years prior to the date of disposal of the shares. But there is no minimum shareholding, nor any minimum holding period in respect of the shares themselves.
Where shareholders are ‘diluted’ below the 5% tests as a result of commercial issues of shares, elections may be made to claim Entrepreneurs’ Relief up to the date of dilution.
Need for advance planning
Given the significant tax savings Entrepreneurs’ Relief can offer, it is essential to review entitlement to the relief at the earliest possible opportunity, as there are a number of pitfalls to avoid and the two year holding period requirement means that if the key issues are not considered in good time, this valuable relief can be lost.
Entrepreneurs’ Relief may also be available in connection with the disposal of the whole or part of a business carried on either by a sole trader or in partnership.
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