To maximise the net cash a shareholder receives on sale of a business it is critical to understand about different tax relief and incentive programmes. One such policy that has a major positive impact on Entrepreneurs when they sell stock or other company assets is the Entrepreneurs' Relief as it is often called, or Business Asset Disposal Relief to give its official name.
In this article, we will explain the requirements for qualifying, the financial ramifications, and how to claim this relief on your tax return. Let's investigate the details of this beneficial tax relief programme.
What is Entrepreneurs' Relief?
Entrepreneurs' Relief has recently been remained as Business Asset Disposal Relief (“BADR”). It is a UK tax scheme designed to incentivise Entrepreneurship and reward individuals who have actively participated in the growth and development of their businesses. It allows eligible individuals to benefit from a reduced rate of capital gains tax (CGT) when selling their business assets, such as shares, in certain qualifying circumstances. It gives eligible business owners a lower CGT rate, allowing them to keep more of the money made from the sales of their business.
What is Business Asset Disposal Relief when selling shares in your business?
Business Asset Disposal Relief (BADR), a more recent name for the same relief programme formerly known as Entrepreneurs' Relief, is used to refer to it. It gives eligible business owners a lower CGT rate, allowing them to keep more of the money made from the sale of their shares or other company assets.
The Benefits of Entrepreneurs' Relief
Entrepreneurs' Relief offers several advantages to businesses based in the UK:
Lower Capital Gains Tax Rate: The capital gains tax rate is 10% on the first £1 million of a gain under this exemption, which is much lower than the regular rate of 20%. For those who qualify, this decreased rate might result in significant tax savings.
Lifetime Allowance: There is a £1 million is a lifetime allowance per individual of qualifying gains subject to the Entrepreneurs' Relief. An owner can make repeated claims for relief up until the combined gains reach this limit. It does not give a relief of £1 million on every business sale.
Smooth Business Succession: Entrepreneurs' Relief supports business succession planning and promotes Entrepreneurship. It facilitates a smooth transfer for the following generation or new owners by lowering the tax burden connected with selling or passing on your firm.
Assets Qualifying for Entrepreneurs' Relief
To qualify for Entrepreneurs' Relief, certain assets need to meet specific criteria. These include:
Shares in a trading company: The stock must be in a business where the investor owns at least 5% of the voting and common stock.
Assets used in a business: Equipment, buildings, and other assets that are utilised in the firm may also be eligible for Entrepreneurs' Relief.
Cash in the business: This can be available for Entrepreneurs’ Relief subject to certain conditions.
Qualification Criteria for Entrepreneurs' Relief
You must fulfil the following conditions to be eligible for Entrepreneurs' Relief for a business in the UK:
Qualifying Period: Before selling or disposing of the company assets or shares, you must have possessed them for at least 24 months.
Minimum Shareholding: You must possess at least 5% of the company's voting rights and common stock to qualify for shares.
Partial Sale: Available if only partial disposal of the business.
Active Participation: You should be a part of the management of the business, an employee, or a director.
How to Claim Entrepreneurs' Relief on Your Tax Return:
Follow these procedures to claim the Entrepreneurs' Relief on your tax return:
Fill out the appropriate area of your Self-Assessment tax return to report the capital gain.
Apply the 10% rate to the qualified gains to determine the Entrepreneurs' Relief.
Submit the relevant data and substantiating records to prove your eligibility.
File the finished tax return by the timeframes specified.
Cost of the sale of shares may be an allowable deduction.
How much is entrepreneurs' relief worth?
Prior to January 1, 2018, this relief provided a 10% Capital Gains Tax rate reduction on eligible gains up to a lifetime cap of £10 million. Entrepreneurs' Relief, however, underwent substantial revisions beginning with the UK Budget for 2020, and its name was changed to Business Asset Disposal Relief. The "lifetime allowance" was then used to replace the "lifetime limit." The limit is now £1 million.
Do entrepreneurs get a tax refund?
Business Asset Disposal Relief, often known as Entrepreneurs' Relief, does not immediately offer a tax return. Instead, it lowers the amount of capital gains tax that must be paid when selling or disposing of qualified company assets with qualifying gains. By utilising a lower Capital Gains Tax rate, you may be able to significantly improve your net financial gain by requesting this relief.
What is entrepreneurs relief called now?
Business asset disposal relief is the new name for the programme formerly known as entrepreneurs' aid. The new name is meant to more accurately represent the relief's overall goal while also reflecting a wider focus on the sale of corporate assets.
Can couples claim entrepreneurs' relief?
Each individual has an annual lifetime allowance of £1m. You can submit a separate claim for business asset disposal relief if you and your partner jointly operate and own a qualified firm. Both individuals can benefit from the lower Capital Gains Tax rate on their individual shares of the qualified gains. However, it is important to fulfil the requirements for qualifying and follow the guidelines established by HM Revenue and Customs (HMRC).
What are the risks when claiming entrepreneurs' relief?
Entrepreneurs’ Relief can be helpful, but it's important to think about the possible dangers before requesting this relief. Risks can include:
Meeting eligibility criteria: The relief is subject to strict requirements. To prevent any problems, it is crucial to fully comprehend and adhere to the HMRC rules.
Lifetime allowance: The amount of qualified profits that are eligible for the lower Capital Gains Tax rate is constrained by a lifetime allowance, which is a condition of the relief. Keep track of your lifetime allowance to make sure you don't go over the allotted amount and forfeit the relief.
Changes in legislation: Each year the UK government may change the conditions for Entrepreneurs’ Relief including adjustments to tax laws and relief programmes. Keeping informed and seeking advice from a qualified adviser will assist you in making plans and navigating future changes.
What is investors' relief?
Investments in unlisted trading enterprises are encouraged by the Investors' benefit tax benefit programme. When selling their shares in qualifying firms, individuals may be entitled for a lower Capital Gains Tax rate of 10% on qualifying gains under this relief. It is important to highlight that investors' relief differs from Entrepreneurs’ Relief for the disposal of company assets in that it has its own unique requirements.
What are the deadlines for claiming Business Asset Disposal Relief? (previously called Entrepreneurs’ Relief)
Depending on the tax year in which the disposal takes place, there are different deadlines for claiming business asset disposal relief. In most cases, you have one year from the 31st of January after the tax year in which the disposal occurred to file a claim. It is essential to follow these dates to guarantee the validity of your claim and prevent any fines or loss of compensation.
How does Capital Gains Tax work without entrepreneurs' relief?
The profit from the sale or disposal of specific assets is subject to capital gains tax (CGT), a tax relief programme called Entrepreneurs' Relief (now called Business Asset Disposal Relief) sought to lighten the burden of CGT for eligible persons. For UK firms, it is essential to comprehend how CGT functions without Entrepreneurs' Relief.
CGT is calculated as the gains from selling chargeable assets and applying the appropriate tax rates to those figures. Once allowed deductions and exemptions have been considered, the gains are normally computed as the difference between the revenues from the asset's sale and the cost of purchasing it.
The individual's income tax band and the kind of asset being sold both affect the current CGT rates. The rates for people can range from 10% to 20%, although they might be higher for carried interest and residential property. It's crucial to remember that certain assets, including the sale of a principal house, have unique regulations and exclusions that may give relief or exclude them from CGT.
It is advised for UK firms to speak with a certified tax expert or accountant who can give expert advice on the most recent rules, rates, and allowances that apply to CGT without Entrepreneurs' Relief to guarantee compliance and proper reporting.
What counts as a qualifying disposal?
The sale or transfer of an asset that is liable to Capital Gains Tax (CGT) in the UK is referred to as a qualified disposal. To accurately calculate their tax liabilities and meet their reporting requirements, UK firms must have a clear understanding of what constitutes a qualified disposal.
Generally, upon sale, a variety of assets may be liable to CGT. These include, but are not limited to, real estate (other than a principal residence), stocks, bonds, companies, and particular personal belongings having a value over predetermined levels.
The transaction must entail a full or partial transfer of ownership or a change in legal title to be considered a disposal for CGT purposes. This can apply to circumstances when an item is destroyed or lost, as well as situations where it is sold, given as a gift, or exchanged for money. It is very important to understand that even if an asset is transferred without receiving anything in return, this might still be considered a qualified disposal and result in CGT responsibilities.
Depending on the type of asset being sold, there may be many complex laws and requirements that must be met. Therefore, it is strongly advised for UK firms to get expert guidance from a trained tax specialist or accountant to guarantee appropriate identification and reporting of qualifying disposals for CGT purposes.
Can my accountant help me claim entrepreneurs’ and investors’ reliefs?
The Entrepreneurs' Relief and Investors' Relief, currently called Business Asset Disposal Relief and Investors' Relief, respectively, can both be claimed with the help of your accountant. These reliefs are meant to lessen qualified persons' Capital Gains Tax (CGT) obligations when they sell certain types of assets.
People who sell or otherwise dispose of their business, shares in a trading company, or assets used in a business they no longer operate are eligible for the Business Asset disposal Relief. Contrarily, Investors' reduction offers CGT reduction to people who invest in unlisted trading businesses.
Your accountant can explain the eligibility requirements, documentation requirements, and appropriate procedures so that you may properly claim these reliefs. They will make sure you fulfil the requirements established by HM Revenue and Customs (HMRC) to be eligible for the reliefs and maximise the tax benefits that are offered.
If you're ready to take the next step and sell your business with confidence, don't hesitate to reach out to Dexterity Partners Founder Dr. Simon Brayshaw on Simon@dexteritypartners.co.uk. With his extensive industry knowledge, strategic approach, and dedication to achieving the best outcomes for his clients, Simon has established himself as a trusted adviser in the realm of business sales.
Selling a business can be a complex and overwhelming process, but with Simon and the Dexterity Partners team by your side, you can navigate the intricacies with ease. Don't miss out on the opportunity to unlock the full potential of your business sale. Contact Simon@dexteritypartenrs.co.uk today and let him guide you toward a successful and rewarding transaction.
Simon Brayshaw - Simon@dexteritypartners.co.uk