What is Entrepreneurs Relief and How Can it Affect Company Directors?

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Entrepreneurs relief can be a helpful tool for contractors. It can help reduce what they pay in tax in certain circumstances. To find out how entrepreneurs relief can save you money as a company director, read on.

What is entrepreneurs relief?

Entrepreneurs relief, now known as business asset disposal relief, refers to a tax break afforded to company directors that decide to liquidate their company. It does this by reducing the amount of Capital Gains Tax (CGT) paid due to the sale of a company, allowing directors and shareholders to save a significant sum of money, assuming the business is solvent.

Although this form of tax relief can be of considerable use to company directors and shareholders alike, there are a few criteria you must meet to be eligible for its benefits.

Are you eligible for entrepreneurs relief?

Selling a company or liquidating shares can often mean a large amount of money changing hands, which also means paying a fair sum in Capital Gains Tax. As entrepreneurs relief exists to help alleviate some of this tax burden, it is essential to know what you must do to benefit from it, allowing you to keep more of your profits.

If you are subject to Capital Gains Tax, you will have to pay a percentage rate dependent on your income tax rate. For those paying a basic rate, a CGT rate of 18% will apply. For those paying an additional or higher rate, a CGT rate of 28% will apply. However, if you were to be eligible for entrepreneurs relief, your CGT rate would fall to just 10%, a significant drop, to say the least.

To find out if you are eligible, read the following conditions:

  • Firstly, the total value of the sale of the company or shares must not exceed £1 million. If capital gains were to exceed this limit, you would instead be subject to marginal relief.
  • The company being liquidated must be a certified and legal trading company. This is also true for a company in which you have shares you want to sell.
  • If you are part of the company or organisation, you must have been an employee or the director for at least three of the past five years.
  • If you are looking to sell your shares in a company, you must have held them continuously for at least three of the past five years.
  • You must be a shareholder of the company, holding a minimum of 5% of the total company shares.

Provided you meet the relevant criteria listed above, you should be eligible for entrepreneur relief should you decide to liquidate your company or sell your shares in a company.

How does claiming entrepreneurs relief work?

Ordinarily, when selling a company or shares, you would receive a tax-free personal allowance of up to £12,000, with anything over being subject to either 18% or 28% Capital Gains Tax, depending on your income tax bracket. You can reduce the Capital Gains Tax to just 10% while keeping the tax-free personal allowance with entrepreneurs relief.

Naturally, this level of saving can make a big difference for any entrepreneur, giving future ventures a much-needed boost or simply providing a lovely holiday fund. All this being said, how exactly do you go about claiming entrepreneurs relief?

Claiming entrepreneurs relief is thankfully quite simple. First, you might want to see how much entrepreneurs relief can save you. This can be done by calculating the overall gain of your company or share sale, simply by totalling your gains and subtracting your losses. Next, deduct your tax-free personal allowance, which is most often set at £12,000. With this amount, deduct a further 10% of the remaining sum for what you will be left with after paying Capital Gains Tax. As you will see, this sum will be notably larger than what the usual tax of 18-28% would leave you with.

After having calculated what entrepreneurs relief could save you, the next step is to claim it. One of the most important factors to note when applying for entrepreneurs relief is that your claim must be documented twelve months from the 31st of January after your company’s tax year or shares were sold. You will need to place your claim for entrepreneurs relief with the HMRC, generally on your annual self-assessment form.

Should you apply for entrepreneurs relief?

Oftentimes, considering whether you should or shouldn’t take action in the finance world requires weighing a range of advantages and disadvantages. However, the answer to this question is a resounding yes, assuming you meet the criteria mentioned above. The money saved by filing for entrepreneurs relief can be notable and easily worth the trouble of the application process.

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