What is entrepreneurs relief?
entrepreneurs relief was an important Capital Gains Tax (CGT) relief available to a business owner when making a disposal of qualifying business assets.
By claiming Entrepreneurs relief, business owners may benefit from a reduced Capital Gains Tax rate of 10% on the first £1 million of qualifying gains.
Because of the favourable tax rate, making sure your business qualifies for Entrepreneurs Relief should be a crucial part of your exit strategy.
What qualifies you for entrepreneurs relief?
There are several instances when an individual may be able to make a successful claim for entrepreneurs relief (Business Asset Disposal Relief) and we have listed the main situations where a claim can be made
- Where you operate your trading business as a sole trader or as a partner in a trading partnership, and decide to sell all or, in some cases, part of your business.
- When you are a company director or employee and sell shares in your own trading company.
- When you serve as a company director or employee and sell assets you personally own that have been used by your personal trading company. For instance, someone operating a trading business via a limited company may, as part of stepping away from the business, sell a property such as a shop that was used by the company.This specific form of relief, known as ‘associated disposal’, also covers situations where a partner exits a partnership and sells both their partnership share and a personally owned asset that was used in the partnership’s trade.
- This specific form of relief, known as ‘associated disposal’, also covers situations where a partner exits a partnership and sells both their partnership share and a personally owned asset that was used in the partnership’s trade.
- When you are a company director or employee and sell eligible shares that were obtained through an Enterprise Management Incentive (EMI) share option scheme.
- When you act as a trustee and dispose of business assets, provided certain specific conditions are met.
Claiming entrepreneurs relief (Business Asset Disposal Relief) involves detailed rules, so it’s essential to seek professional advice to ensure your situation meets the necessary conditions for a successful claim.
Broadly, you can qualify for entrepreneurs relief (Business Asset Disposal Relief) if you are a sole trader, partner or own shares in a company, provided a business is carried on and certain other conditions are met.
What counts as a qualifying disposal?
Below, we outline the key qualifying conditions that apply to the main scenarios where entrepreneurs relief (Business Asset Disposal Relief) may be claimed.
Sole traders and partners
Entrepreneurs relief (Business Asset Disposal Relief) may be available to a sole trader or partner when business assets are disposed of, provided the disposal qualifies under the relevant criteria. The following are considered qualifying disposals of business assets:
- Disposing of all or a portion of a business that has been owned by you for at least two years.
- This may cover assets such as business premises and goodwill, but excludes those held for investment purposes.
- The disposal of assets that were used for business purposes at the time the business ceased, provided you owned the business for at least two years prior to its cessation. The disposal of the asset must take place within three years of the business ending its operations.
- Goodwill transferred to a limited company during the incorporation of a self-employed business no longer qualifies for relief, making this a key exception to be aware of. We can help clarify the general tax implications of incorporation and ensure that all eligible business expenses are properly claimed.
A business is only considered eligible if it involves a trade, profession, or vocation carried out commercially with the intention of generating a profit. An investment business would not qualify. A disposal of furnished holiday lettings is potentially eligible for relief but a disposal of a ‘normal’ let property will not qualify.
What is a Trading Company?
HMRC considers a trading company to be one that mainly carries out trading activities and does not engage in substantial non-trading activities.
Non-trading activities may be seen as substantial if they make up more than 20% of factors such as turnover, assets, or staff time. These benchmarks help determine the company’s status.
If it’s unclear whether your business qualifies as a trading company, it’s wise to seek professional advice. In many cases, though, the distinction is straightforward.
What is a Personal Company?
A personal company is defined as one where you hold at least 5% of the ordinary share capital, providing you with a minimum of 5% of the voting rights. Additionally, you must be entitled to at least 5% of the company’s distributable profits and assets on winding up, or to at least 5% of the proceeds from the sale of the entire ordinary share capital.
Shares
How long must you hold shares to qualify for Entrepreneurs Relief?
- To qualify for Entrepreneurs Relief (Business Asset Disposal Relief), you must meet specific conditions for at least two years prior to the date you dispose of your shares:
- You must be an employee or officeholder (such as a director) of the company, or of one or more companies within the group.
- The company must be a trading company, or a holding company of a trading group.
- The company where the shares or securities are held must be your personal company.
Part Disposal
Caution is needed when making a partial sale of your business rather than a full disposal.
A straightforward sale of a business asset without any change in the nature of the ongoing business typically does not qualify for Entrepreneurs Relief (Business Asset Disposal Relief). For instance, selling a shop used by the business while continuing to operate the trade may not meet the qualifying conditions.
If only part of the business is sold, it’s important to determine whether this counts as a genuine part of the business or just a sale of business assets. To qualify, the sale must result in a significant change in how the business operates. You should be able to demonstrate that the business before and after the disposal is materially different essentially showing that two distinct businesses exist.
Associated Disposal
If your limited company uses assets personally owned by you, you may be eligible for associated disposal relief but only if you’re also disposing of shares that qualify for Entrepreneurs Relief (Business Asset Disposal Relief).
- This relief may be reduced if:
- The asset was partly used for non-business purposes,
- It wasn’t used throughout your ownership
- You received compensation (e.g. rent) for its use.
Associated disposals can also apply when a partner sells both their partnership interest and a personally owned asset used in the trade.
Generally, you must dispose of at least a 5% shareholding or partnership interest. Professional advice is recommended to assess your eligibility.
Assets Disposed of After Cessation
Entrepreneurs relief (Business Asset Disposal Relief) may still be available to a sole trader who has ceased trading, provided an asset used in the business is disposed of within three years of cessation. The asset must have been in use at the time the business ceased.
What you do with the asset during those three years typically doesn’t affect eligibility. For instance, you could choose to rent out a former business property such as a shop, and still qualify for the relief.
This differs from the associated disposal rules. In those cases, HMRC usually allows a claim if the asset was used in the business within two years before cessation and is sold within one year of stopping the trade. However, a claim may still be accepted within three years provided the asset hasn’t been let or used for other purposes in that time.
IN Accountancy can help you with your Capital Gains Tax
At IN Accountancy, we’re here to ensure you make informed, confident decisions when it comes to Capital Gains Tax. From understanding what you owe to identifying the reliefs you’re entitled to such as Business Asset Disposal Relief (Entrepreneurs’ Relief), Private Residence Relief, and more we help you plan effectively and avoid costly surprises.
Whether you’re disposing of property, shares, a business, or other assets, we provide clear, tailored guidance to help you minimise your liability and retain more of your gains. With the right strategy, timing, and advice, you can stay in control of your tax affairs every step of the way.
