Entrepreneurs’ relief applies to the sale of a qualifying business asset that is made on or after 6 April 2008. It is relevant if you sell a business asset but is also relevant to a contractor closing down their limited company and withdrawing accumulated profits as a capital distribution.
The relief is available as long as you have met the qualifying conditions throughout a one-year qualifying period, either up to the date of disposal or the date the business ceased in anticipation of the closure of the company. The relief is subject to a lifetime limit of £10,000,000 of qualifying capital gains for each individual (previously £5,000,000 up to 31 March 2011).
Entrepreneurs’ Relief is available to individuals and some trustees of settlements, but is not available to companies and personal representatives of deceased persons.
If you are entitled to Entrepreneurs’ Relief, the first £10,000,000 of qualifying gains will be charged at a rate of Capital Gains Tax (CGT) of 10% and any gains over and above this limit will be charged at the rate of 18% if you are a Basic Rate Tax payer or 28% if you are a Higher Rate Tax payer.
Claiming entrepreneurs' relief
To claim Entrepreneurs’ Relief you have to meet the relevant qualifying conditions throughout a period of one year prior to making the gain. You can claim relief, subject to the qualifying conditions set out below, on a disposal of the following assets:
- Shares in your personal company. The shares must be disposed (winding up a company constitutes a disposal) while the company is a trading company or within 3 years from the date it ceased to be a trading company. In addition you must have held 5% or more of the ordinary shares and been a director or employee of the company for the qualifying one year period.
- Assets used in the business comprised in a disposal of the whole or part of your business.
- Assets that were in use for your business and were disposed of within the period of three years after the time the business has ceased.
- Assets owned by you personally but used in a business carried on by your personal trading company.
Maximum entrepreneurs' relief
Entrepreneurs’ relief may be claimed on more than one qualifying disposal as long as the £10,000,000 limit of qualifying gains is not exceeded. Because you may be entitled to relief on more than one occasion, it is important that you keep a record of the gains against which you may have previously made a claim.
If your qualifying net gains exceed £10,000,000, no further relief is due and the excess over that amount is wholly chargeable at the appropriate CGT rate.
Husband, wife or civil partners
Husbands, wives and civil partners are treated separately for entrepreneurs’ relief. Each person is entitled to relief up to the maximum lifetime limit of £10,000,000 qualifying gains, provided the relevant conditions are satisfied.
New Targeted Anti-Avoidance Rule (TAAR) from April 2016
A new TAAR has been announced by HMRC directed at some shareholders of close companies ( i.e. where there are five or fewer shareholders or any number of shareholders who are also directors of the company) where the shareholders have received a distribution from their company which is capital in nature rather than income in order to obtain a tax advantage.
HMRC consider that there will be more incentive for shareholders to attempt to direct income from companies via the capital distribution route with the planned changes to the way that dividends are taxed from April 2016.
Therefore going forward, a distribution from a winding up will be treated as if it were an income distribution where the following conditions are met:
- an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
- within a period of two years after the distribution, S continues to be involved in a similar trade or activity.
- the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage
Valid commercial reasons for closing your company such as retirement or moving to a permanent PAYE position, for example, remain unaffected with regards to the Targeted Anti-Avoidance rules.
HMRC are in most part targeting individuals who are closing companies and then incorporating another company again soon after ( “phoenixing “ companies) to take advantage of the tax efficiency of the capital distribution route.